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Cheap Term vs Whole Life: Which to choose?

When people look for life insurance, the first type of policy they usually learn about is Term life. Perhaps that is because the premiums are cheap while providing high face amounts, and many people are only concerned about protecting themselves for the immediate future. The other option is whole life. It is more expensive, but has some benefits that make the cost well worth while. And if purchased while you are young, the cost is not out of reach for most people.

Deciding what you need
Buy term insurance if you have a mortgage or other large loan and need to be sure it can be paid if you should die. Also buy term if your primary concern is providing a good source of income for a growing family whose lifestyle would change without your income. The term will expire at about the time your children are grown, but as long as you have planned for your own final expense in another way and have made plans for retirement, you may not care if the term expires.

However, don't purchase term insurance if you want cash value that you can surrender or convert to a retirement instrument in later years. Also, purchase whole life instead of term if you want to increase your assets, or if you want a source for emergency cash (in the form of a loan).

Understanding the Term Vocabulary
When people purchase term insurance, they usually purchase "level term," meaning neither the premium nor the face value will change during the period of the term. This type of term is always the best of all the term possibilities, but if you fall for an attractive flyer with low prices and vague language that arrives in your mail box—look out. You may end up with either "annual renewable term" or "decreasing term." Neither of these options is desirable, although sometimes they are the only options available when it comes time to renew a level term.

An annually renewable term is term insurance for one year. You renew it—at an increased price—every year. The premium increases get steeper as you get older. With decreasing term, the price remains level, but the face value drops every year, and usually ends completely by age 80 or 85.

Renewing the Term
When the initial term of Term Life insurance expires, you have the option of renewing it. At this time, you will be able to choose from anything the company offers, and usually with no medical underwriting. If the company offers whole life, you may be able to convert at least part of your term to a guaranteed whole life policy and lock in the price to age 100. If the company does not offer whole life, your options are likely to be annual renewable term or decreasing term, or a policy from a different company.

Know what the company offers
Before committing to any policy, it's a good idea to check the insurance company ratings and to also ask what types of policies the company offers. Even though you may be interested in a Term policy for the moment, it's good to know what your conversion options will be in the future. Make sure the company has options you may want.


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