Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 19, 2021

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Insurance match-ups: “Term life vs. whole life insurance.”

Ah, one of life’s, or more accurately, death’s, most contemplated decisions.

One you certainly can’t afford to mess up. After all, the point of life insurance is to make sure surviving loved ones are taken care of in the event you are no longer able to do so (how does life insurance work?).

Death is final. And so is the death benefit on a life insurance policy.

Let’s take a look at the basics of each type of policy to gain a better understanding. This will allow you to make an informed decision about which life insurance option is best for you…or more importantly, your family or surviving spouse.

Whole Life Insurance (Old School Life Insurance)

This is most certainly “your father’s” life insurance policy. It was the way things were done until term life insurance came around and offered a different option.

The main things to remember here are as follows:

1. Whole life insurance is more expensive – You will pay more each month for a whole life policy than you will for term life. There’s no way around that one.

2. Whole life insurance is for your whole life – it sounds redundant, but a whole life policy is purchased at one point and is meant to continue until you die, where the death benefit is paid to your beneficiary (as long as you keep paying your insurance premium!).

3. Whole life insurance accrues cash value – The premium you pay into a whole life policy is put into an account (simply put) that builds up over time. You are able to borrow against this type of policy and make payments back into the kitty over time. If you die with outstanding money, it’s subtracted from the pay out.

4. Same payment for the life of the policy – It may be more expensive each month, but you pay the same monthly premium when the policy is issued, let’s say when you’re 25, that you do when you’re 85 years old.

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Term Life Insurance (New Kid on the Block)

Term life insurance has not been around as long as whole life insurance, but like many “new” things, it offers some benefits not available in the “older” version.

Here are the keys to term life insurance:

1. It’s cheap, cheap, cheap – Term life insurance is a fraction of the cost of a whole life policy. Why? Because there is no guarantee the insurer will pay out a dime. If your term ends…and you’re still with us, that’s it. You get no financial benefit. Of course, the older you get the more term life costs because the higher the odds the insurance company will have to pay an insurance claim.

(How much does life insurance cost?)

2. Higher policy limits (this ties into cost) – To be clear, whole and term life insurance policies can offer the exact same death benefit. However, with term life, you can get VERY HIGH limits for very little money.

3. Term life insurance policies have a beginning and an end – And the “end” may very well come while you’re still alive – meaning no death benefit is paid out.

4. No cash value accrual – With term life insurance, you pay the premium and get a death benefit if you die during the policy term. There is no account to borrow from.

Which Is Better? Term or Whole?

That’s up to you. It depends on where you sit financially. If you are young and don’t have a lot of money to spend on life insurance, but would like to leave a large chunk of money to your surviving loved ones, term life insurance may be the way to go.

Additionally, if you think your finances may change later in life (for the better), you may opt for term “for the time being,” to get you by until you can get on-board with a whole life insurance policy that guarantees a death benefit (when you can afford the higher premium).

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If you are set as far as income goes, you may want to go for the whole life policy. Don’t give too much credit to the accrual of cash value on a whole life policy though.

Many financial professionals recommend putting your money into other investment vehicles if your goal is to grow your money.

The cash accrual benefit might have made more sense “back in the day,” when we stayed with the same employer for a long time and were slightly more certain about the future from an income standpoint (picture working at “the plant” for 25 years, then retiring).

If you’re in the market for life insurance, be sure to compare insurance quotes online and/or contact an independent insurance agent to weigh all your options.

Read more: How much life insurance do I need?

(photo: eckes/bernd)