Which Is Better Life Insurance: Term Life or Whole Life?

Life insurance steps in and covers any financial gaps left by your passing. These gaps might include your mortgage payments, child's private school tuition, and health care expenses. They can include your credit card balances and even your funeral arrangements. Lacking coverage, your spouse and family might find themselves without the financial resources necessary to meet their needs. The question is, which type of policy is better for your circumstances: term life insurance or whole life?

Each person's financial plan is unique. For that reason, it's impossible to say that one type of life insurance coverage is always superior to the other. With that in mind, we'll provide an overview of term and whole life, including the strengths and weaknesses of each product. This should provide you with a broad base if background information from which you can ultimately make your decision on which product suits your situation best.

Term And Whole Life In A Nutshell

While there are several nuances that are dissimilar between term life insurance and whole life, all spring from one overriding difference: a forced savings option. Term life insurance has a 'term' to it, and therefore an 'end' date and surrender value. Sometimes, the policy is renewable each year with steadily rising premiums. Other times, the contract "levels" the premiums for a defined period (e.g. 5, 10, 20 years, etc.).

Whole life insurance blends a cash payout with a forced savings option. This latter feature is often promoted as an investment vehicle. The value of this option is based on a basket of underlying securities, which can include bonds, stocks, and other instruments. Over time, the value of the investment portion rises, allowing you to borrow against it.

The Problem With The Investment Option

Initially, the investment feature (or forced savings option) seems attractive. A portion of your premiums is automatically allocated toward the investment piece, which rises in value. However, the rate of return most policyholders realize is rarely, if ever, competitive with alternative investment vehicles. A low-end mutual fund will usually outperform the basket of securities underlying the whole life contract.

Equally troubling is the fact that this isn't usually clear to the owner of the policy. This happens for two reasons. First, it is nearly impossible to determine the percentage of your premiums that is allocated to the investment portion. Second, lofty fees and commissions can obfuscate the matter further. They're often equal to the aggregate premium you'll pay during the first year.

This does not indicate that full life assurance is always a poor choice. There are occasions when such a policy could be suitable.

When A Whole Life Policy Makes Sense

One of the reasons many people choose whole life over term insurance is because the former does not require you to submit to a medical examination. That should raise a warning flag. The insurer is willing to abandon caution and extend coverage to a person who may have an existing medical condition. Life insurers usually do this because of the tremendous margins they build into these products. This type of insurance is therefore more costly.

Whole life can also be appropriate for those with substantial wealth who carry the contract for decades. The cash value of the investment portion combined with the payout upon death can be used to settle their estate taxes.

Is it worth switching Life Insurance Products?

If you already have life insurance and are considering switching to a different life insurance product. Should you switch? It depends. There are some important considerations you should first deliberate.

First, you'll need to consider your policy's cash value (it's often called a surrender value). This is the amount your insurer will pay you if you decide to terminate your contract prior to its maturity. After compensating service costs and commissions the cash value is negligible for the first ten years of a policy. Should you decide to cancel your life insurance prematurely you should expect a negligible return on your investment.

Second, your insurer will probabably require the results of a medical exam before considering you for term life insurance. If you're a habitual smoker, suffer from existing health conditions, or are over the age of fifty, a term policy may not offer significant savings.

Bottom line: review your situation and investigate your options. In many situations term life insurance makes the most financial sense. That said, as mentioned, each person's circumstances are unique. First you'll need to decide which type of policy works best in your situation. Step 2: compare some life insurance rates. Shopping for life insurance online is probably the easiest way to quickly do your comparison shopping. You'll find that doing so can help you save a significant amount of money.

About The Author Kade Phillips is a contributing writer for www.Kanetix.com . Visit Kanetix for low cost insurance quotes, on life insurance and much more. If you're from Canada, click on over to www.kanetix.ca, for cheap car insurance quotes and lower costs on just about all of your other personal insurance needs through comparison shopping.