Why Term Life Insurance is Better than Whole Life Insurance

Life insurance exists as a product to create a false estate for an individual.  Think about it, early in your career you haven’t amassed any wealthy yet; but, if you were to pass your spouse and children would be financially devastated by the loss of your income.  So you get a life insurance policy to offset that loss.  (Read Six Reasons to Get Life Insurance to find out if you even need life insurance.)  But as you get older, you build a significant portfolio and no longer need life insurance.

For the average person, life insurance was never intended to last your whole life as it does with a whole life policy.  By looking at the purpose of life insurance alone, you get a glimpse into the first reason term life insurance is better than whole life insurance.  Term life fulfills its purpose and then it ends.  You will no longer be paying the expense of life insurance as long as you have been diligent to save and invested wisely during the term of that insurance policy.

The second big reason term life is better is because it meets your need and costs a lot less.  Let’s look at how whole life insurance works in general.  The insurable portion of a whole life policy is term life insurance; but on top of paying for that insurance, you’re building cash value in an investment portion of the policy.  On the surface it doesn’t look too bad.  It actually sounds good.  But in reality it’s not good for at least 5 reasons:

1. The cash (that’s your money) cannot be taken from the policy unless you borrow it and pay it back with interest.
2. Upon your death, the insurance company keeps your cash.  This is great for the insurance company because they’ve just offset their risk by the amount fo cash accumulated in the policy.  It’s not so great for your family because if you had been saving that money outside the policy, they would have the life insurance proceeds plus the cash.
3. The investment portion of the policy grows at a very low rate of return.  On average, with whole life policies the yield is 2.6% per year.
4. Whole life policies are often sold as a retirement savings vehicle.  However, the investment portion does not qualify as an IRA, so you lose any possible tax deductions you would be entitled to.
5. For the first 3 years of the policy you’re not building any savings.  The extra money you’re paying is going towards expenses associated with owning the policy.  (I believe that this is why 70% of all life insurance policies sold are cash value policies–an insurance agent makes a lot more money selling whole life insurance than he does selling term life.)

The bottom line is that term life insurance is better for the consumer (you) than whole life because it serves your needs, not the needs of the insurance company and its agents.