Why Term Life Insurance is Your Best Choice

November 2, 2015

There’s an ongoing debate as to which is the better choice, whole life insurance or term life insurance? For most people, term life insurance is your best choice. In fact, in most cases, it’s not even close.

Here are the reasons why we think term life insurance is your best choice…

It Costs a Lot Less Than Whole Life or Other Investment-centric Policies

Life insurance agents love to sell whole life policies and other investment-centric insurance products on the investment provision. It provides a double benefit – investment accumulation, plus life insurance. It’s a compelling sales pitch, but it’s a very expensive one.

The difference between whole life insurance and term life insurance on a per thousand basis isn’t minor. A whole life policy can easily cost 10 times as much for the same level of coverage. The cost advantage is overwhelmingly in favor of term life insurance.

You Can Buy a Lot More of It

Because term life insurance costs so much less than whole life, you can buy a lot more of it. This is a major factor, especially for young families with small children.

The need for life insurance is never greater than when you have very young children. Not only are there more years to replace lost income that may result from your death, but you also have to be concerned with providing them with money for a college education.

This is also a time in life when families tend to have maximum levels of debt. They buy a house with a minimum down payment (and a maximum mortgage), they have new cars that are financed, credit card debts, and often student loan debts carried over from their college years.

Covering all of those obligations will usually take several hundred thousand dollars worth of insurance, and even into the millions. Very few young families can afford the premiums for that kind of coverage if it is provided by a whole life policy. By contrast, high face value term life insurance is far more affordable.

It Can Be Tied to Specific Obligations

Term life insurance policies are also more flexible than their whole life cousins. Because they run for specific terms, generally anywhere between five years and 30 years, they can be tied to specific obligations. Once the obligation is gone, the policy can be allowed to lapse.

Perhaps the best example of this is having a term life insurance policy for the specific purpose of paying off your mortgage. If you recently took a 30 year mortgage, you can also take a 30 year term life insurance policy in the same amount as the mortgage. Upon your death, the mortgage could be paid automatically out of the proceeds of the insurance policy, enabling your family to live in their home mortgage-free.

You Can Cut Back When You No Longer Need It

One of the under-appreciated secrets of life insurance is that the amount that you need rises and falls over the course of your life. Earlier I gave an example of a young family with large obligations. That family will need a high level of life insurance coverage. But as the family matures, and the children reach adulthood, the parents will no longer need anything close to that amount of coverage.

An empty nest household may find that their need for life insurance declines by 50% or more. With a term life insurance policy, the reduction in coverage can happen automatically. However if your insurance is provided by whole life policies, the coverage will remain fixed for the rest of your life. That can mean that you’ll be paying for coverage that you really don’t need.

It Leaves You With More Money For Investing

Since term life insurance costs so much less than whole life, you can take the money that you save on premiums and invest it in mutual funds. That will enable you to increase your financial assets as the years go by.

This is important in relation to life insurance. The greatest need for life insurance occurs during times in life when you have the fewest financial assets. As your financial asset base grows, your need for life insurance declines. In a real way, the higher level of financial assets means that you gradually become self-insured.

It is even conceivable that you can reach a level of financial security that you no longer need life insurance at all.

It’s Pure Insurance Because Less of It Goes to Fees

Term life insurance is pure life insurance. That’s true because there is no investment provision – and because less of your premium goes toward fees.

It’s no secret that life insurance agents make more money selling whole life insurance policies, and other investment type life insurance products. This is possible because the investment provisions are packed with fees.

For example, though life insurance agents will sell you heavily on the concept of cash accumulation in your policy, very little cash accumulation takes place in the first few years that you have your policy. The reason that it doesn’t is because much of the premium goes to paying for commissions.

And even after your policy does begin to accumulate cash value, you’re still paying commissions and other fees that are eating up at least a portion of your premium.

It’s probably true that a whole life insurance policy is better than having no insurance and no investment plan at all. But if you can buy term life insurance, and begin putting money into a mutual fund or exchange traded fund based on the S&P 500 index, you’ll almost always come out way ahead of the person who takes an equivalent amount of whole life insurance.

If you’re an advocate for whole life insurance, please feel free to comment below on what cases you think whole life is suited for.


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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2 Responses to Why Term Life Insurance is Your Best Choice

  • Kevin Mercadante

    Agreed James. And at that the investment component of whole life is way overblown. After paying fees, you can do much better putting your money into a no-load index based ETF. That way you can save on insurance premiums, and maximize your investment return.

  • James Pollard

    You hit the nail on the head! I always recommend term insurance, and never whole life insurance. My philosophy is this: keep your insurance and investments separate. If you want to buy insurance, get whole life. If you want to invest, that’s a whole other topic. Too many people try to rationalize whole life when at the end of the day it’s just insurance.

    Get what you need and then move on. You can’t waste time rationalizing stupid decisions. 🙂