Whole life insurance and term life insurance do have one major similarity--both pay a benefit in the event of the policyholder's death. The costs and other features associated with these types of policies differ, however. A person who is shopping for life insurance needs to consider what he wants out of the policy before buying.
Identification
A term policy solely offers life coverage. This means that when the insured person dies, the face amount of the policy is paid to the beneficiary named in the policy. Whole life insurance offers this same basic death benefit, but it combines this with some sort of investment component. The policyholder can borrow against or withdraw from the investment. The investment may be in stocks, bonds or money-market instruments, according to SmartMoney.com.
Cost
Whole life insurance is more costly than life term insurance, as a portion of what you pay goes into the policy's death benefit and another portion goes into the investment portion, advises CNN Money columnist Walter Updegrave. Whole life policies can also come with high commissions and fees and may have hidden up-front commissions, advises SmartMoney.com. With term life insurance, a person only pays for the death benefit. A person can lock in a monthly payment amount over the life of his policy with both term and whole life insurance. Most term life premiums, however, are set up to increase over time, and may only allow for a certain period of locked-in payments, such as 20 years.
Time Frame
Term life insurance may be purchased for varying periods time. In fact, a person can find policies that last one year up to 30 years, according to SmartMoney.com. It's best to hold on to whole life insurance policies for more than 20 years, James Hunt, Consumer Federation of America actuary, tells SmartMoney.com. Hunt says whole life policies rarely yield a decent return unless held for that long, and most policies don't even begin build decent a cash value until 12 to 15 years have passed.
Considerations
An insurance purchaser needs to look at how financially sound the insurer he's considering is, advises SmartMoney.com. This is especially important for policies that a person intends to keep for 20 to 30 years. It's best to choose an insurer that is rated A or better by an independent rater, such as Standard & Poor's. Those that are the most financially sound have the AAA rating. Also, monitor your insurer's ratings regularly, advises Consumer Reports.
Expert Insight
Consumer Reports recommends buying term life insurance over whole life policy insurance. Also, shop around for insurance, because prices can vary widely. Consumer Reports recommends diversifying by purchasing coverage within the guaranty association limit allowed by your state from separate companies. This added safety from multiple policies, however, may cost a higher combined premium than using a single policy.
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