Term vs. Whole Life Insurance- Which is best for my family?

There are so many options out there when it come to getting life insurance for your family, that it can make your head spin. Most Investment guys will scream “Buy Term and Invest the Difference”. Insurance companies will tell you that you and your family deserve “permanent protection”. If you do a search on the internet, you will see heated discussions between the two parties, each accusing the other of just being after your money. If you already own a policy, you may find yourself wondering, due to some new information that you have received, if it really is the best thing for you. Properly protecting your family shouldn’t be this hard of a decision.

In my opinion, Term life insurance is the most beneficial for a family 95% of the time. This is why most third party experts, such as Dave Ramsey and Suze Orman, tend to back the BTID (Buy Term and Invest the Difference) philosophy. Unfortunately, if you were sold life insurance by a friend or relative, or if you sought out life insurance from an agent, chances are you have a cash value policy. The insurance companies tend to push these products, sometimes even when it is not in the clients best interest to do so. Of the cash value life policies, Whole Life is probably the best (stay far away from Universal or Variable life products, they are absolutely horrible, and if you have one of these policies, get out now, they are set to self-destruct, but that’s a sermon for another soapbox). Each individual has different needs, and each case is different, but you guys have no reason to take my word for it. Therefore, I am going to empower you to figure it yourself, by showing you how I found mine, and what I do for clients. All it takes is a calculator, a few quotes, and a little know.

STEP 1: How much insurance do you need, and for how long (if you go with term)? Each person is different, and there are a lot of factors to figure in which you may need the help of an expert (such as debt, length of mortgage, how old your children are, how much you make, etc.) A good rule of thumb would be 10-20 times your annual income, and getting you as close to retirement as possible. In my case, I was 32 with little savings when I got life insurance, and felt like I needed it for 30 years to give me a chance to build income. I Needed $500K on me, and $400K on my wife.

STEP 2: What is the maximum that I can budget to spend? If you shop for whole life, it is expensive. Unless you are wealthy, you may not be able to afford 10-20 times your annual salary, so an important factor in choosing your policy will be discovering how close you can get to your needed amount and if that is acceptable to you. I knew I couldn’t pay more than $200 a month for life insurance.

STEP 3: Get several quotes to compare. I would recommend getting at least 3 quotes on each type, and only from companies that carry an A+ rating with AM’s Best. You can check their ratings here: .
Term life is very straight forward, but you do need to ask what options are available at the end of the term. This is just in case things don’t work out the way you plan. Most terms can be converted to whole-life, which is an OK option, but the best option is one that converts to a Decreasing Term, (or less insurance for the same amount of money). Chances are that if you still need insurance, you may not need as much, and term at, near, or after retirement age is expensive. You also need to make sure you are getting a fixed-level term (meaning your payments will not go up for the duration of the term), and that it can be renewed no matter what health you are in.
With Whole Life, you need to ask what the interest rate is on the cash value account. You also need to know how much of your money will be going into the savings account every month, and how soon it will start. Most of your monthly premium will be going towards the cost of insurance, and for the first couple of years the money that should be going into the savings is actually going out in fees and commissions.
When I was looking for mine, I took the most appealing (not the cheapest) of each category and compared them:

-I could get $500K on myself and $400K on my wife (with $10K on each of the kids) in a 30-year fixed level term for 30 years for $85/mth. OR

-I could get $150K on myself and $100K on my wife in Whole-Life for @ $200 a month. This policy had a guaranteed interest rate of 4%. Every month, approximately $110 paid for my insurance, and $90 went into the savings component. For the first three years, however, the $90 went out in fees and commissions.

Now for me, this was all the information I needed in making an informed decision. The most important factor in getting life insurance is getting the proper amount of coverage, everything else is secondary to that. It does my family little good for me to pay through the nose for life insurance that is not going to last my family very long if something happens to me. If I can not afford decent coverage with whole life, then I am better off with term. If you are under 55, and have a family depending upon your income, and can not afford 10 to 20 times your income with Whole Life, then you don’t really need to read any further, Term Life Insurance is your best option. But, just for the sake of expounding upon the determination process, I will show you how to complete the comparison.

STEP 4: Evaluate: in which case will my family benefit the most if something happens to me before the term is up? This is very simple, look at your face value and your cost per month. The answer here is almost always term. You get more bang for your buck. Even if the cash value is also available (and in most cases it is not), it is still not enough to cover the spread between the face values. In my case, it was a no-brainer: $500K @ $85/month vs. $150K @ $200/month. As I mentioned before, if I died tomorrow, $150K would not do much for my family, it would leave me woefully underinsured. $500K would pay off our mortgage and debt completely ,and supply my wife with @ $20K of annual income for the next 20 yrs. Term won that round.

STEP 5: Evaluate: In which case will my family benefit the most if something happens to me after the term expires? This is not only the most likely scenario, but this is also where is starts to get confusing for most people. In this case, you have to rely on projections and predictions. Here’s how to weigh the advantages and disadvantages of both: First of all, you have to know how to figure compound interest. The formula is Principal x (1 + interest rate) to the power of the number of years invested. If this is to complex for you, or you just don’t want to spend all day doing this, you can use this financial calculator.

Whole-Life: There is no way of knowing exactly when you are going to die, so the best thing to do is try to shoot for age 65 (the average retirement age of a person, when most people will cash out their savings). Remember that the first few years of the savings component are not being paid in, so you have to deduct them from the number of years saved. I’ll use my example again: $90 of my premium would have went into my savings component, and would have earned a guaranteed 4% interest. Since the first 3 years would have went out in fees and commissions, I would have app 30 years to invest. At the age of 65, I would have $62,464.45.

Buying Term and Investing the Difference: If you only buy term insurance, and do not put the remainder in my savings, the answer here would also be obvious. You would be better off with the Whole-life. Term life has no savings component, therefore your savings and face amount @ age 65 would be $0. However, remember that I advised you to see what you could budget for (in step 2). You can take the cost difference and invest it into your retirement, and get some pretty powerful results. This is what people are referring to when the say “Buy Term and Invest the Difference”. Shoot for the same age of 65 and run your results @ 6%, 8%, and 10% and see what you get. I’ll use my own example. The cost difference between my proposed whole life policy and my term policy was $115 a month.
$115 a month for 33 years @6%= $142,763.26
@8%= $222,369.22

STEP 5: Weigh in other factors: Now, it was pretty obvious to me which savings method is the best for me. Neither one of these options is going to get me to retirement in and of themselves, but the key is that even if market performance is terrible, and I only receive a 6% rate, I will already have accrued enough money just in the savings from selecting term to have at least $142,763.26 that I can put aside in a separate account to take care of estate taxes, burial cost, and leave a small legacy for my family when something happens to me. At that point, I will no longer need life insurance. In addition to this, I would no longer have to pay life insurance premiums every month. With the Whole Life option, I would only have $62,464.45 in savings, and would have to continue paying premiums until the policy matures, which is usually around age 85. You would need to do a similar comparison.
Now, bear in mind when comparing these options that the 4% from the whole life policy is guaranteed, whereas retirement funds are not. Chances are that you will probably get a better return with “buying term and investing the difference”, but there exists a small chance that you may not. The difference needs to be significant enough that it is worth some risk to you.
Also, another factor to consider is the maturation date of the cash value of the whole life, and how it effects the death benefit. Most whole life policies do not pay the cash value plus the face amount until the cash value matures. In other words, If I were to die prior to age 85, my family would only receive $150K, and the insurance company would get to keep whatever cash value I had accrued. If I died prior to age 63 with term insurance, my family would have access to both my death benefit and my savings. If I die after 63 with term insurance, my family gets my savings, which is much larger than it would be if I had been spending all that money on whole life insurance.
If you ever make the mistake of “borrowing” money from your whole-life cash value, it gets even worse. You are charged 8% interest until you put it back, and if you still owe money when you die, they deduct it from your death benefit. For instance, if my face value was $150K, and I had $50K in my cash value. I could “borrow” (this is my own money I’m borrowing by the way) up to $40K. Let’s suppose I borrow $20K at age 56, and die at age 62 without repaying it. I would now owe $32,270.04, and therefore my family would only receive @$120K. If I took the same $20K out of my IRA, I would pay a 10% fee and be subject to capital gains tax, but my $500K death benefit would remain untouched.

I know this is a lot of information, but I hope it is helpful in making your decision. As, I stated before, most people are going to be better off with term, but not always. In a lot of cases, families that have been in Cash Value policies for years can still benefit from switching to term policies, although I would advise consulting a licensed expert before doing so. In today's world unfortunately, a lot of insurance policies are sold with smoke and mirrors, but the numbers don’t lie. Rely on the numbers, and the best of luck to you.

Comments 26 comments

Kathy 5 years ago

Hi James - I appreciate this article! Even though I don't enjoy calculations and planning like this, you made it simple enough to follow (and your personal examples helped).

My husband and I are going through a comprehensive financial review with our financial institution. It's a top-rated institution and we have most of our accounts and insurance through them. I trust them. My husband and I each have about 275K in term insurance that will expire near the time we reach retirement. This is below the 10-20x income suggestion, so we are slightly underinsured. In the course of the financial review our planner (who, by the way, does not receive commissions...or so we're told, I guess; I have to trust that) suggested we might want to add additional life insurance coverage and he suggested a 100K whole life policy. Our premiums would be around $75 each/each month.

I have always been taught to be wary of whole life and that term was the way to go, for the reasons you stated and the Dave Ramsey "invest the rest" concept. Our planner addressed our concerns and responded with a few arguments that I thought made sense (though I still have an icky feeling about it). One of the arguments for whole life is that we don't want all our eggs in one basket, so to speak. I know he's not promoting whole life as an investment vehicle, because he said that directly (and we have additional retirements savings we're working on growing). I think what he's suggesting is that if we were to have all of our money tied up in the stock market through our IRAs (the "invest the rest" part), then it's not guaranteed to be there when we need it. That a whole life policy guarantees that a portion of our assets will be available to us. To me, then, it comes down to question of how much risk my husband and I are willing to deal with. Do we want to throw the whole she-bang into the stock market through our IRAs, planning on saving more than we need in retirement so that we can use the rest for final expenses? Or do we want to ensure that we have some funds 100% available to us for final expenses no matter what the future stock market holds? Does that make sense how I'm describing it?

I'm sorry for this terrible run-on comment and I hope I'm not asking for free advice here, but I was just wondering if you could speak to that counter-argument about not having all your eggs in one basket for final expenses.

Thanks very much!


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jamesrcooper 5 years ago from Rock Hill, SC Author

Thank you Kathy for your insightful comments. As I stated before, I do not believe in giving blanket endorsements, as each person is different, nor do I believe that whole life is completely wrong in every situation. For a person who has no savings, is older, and is concerned about leaving a legacy for their family and covering death costs, a small whole life policy may be in order.

The first thing to figure out would be how much coverage is really needed and for how long. 10-20 years is a good rule of thumb, but there really are a lot of factors to consider. What is needed to pay off the mortgage? How much longer are the children going to be in the house? How many years of income need to be replaced? It sounds as if you have taken the first steps towards resolving this.

However, as to addressing a shortfall in coverage and creating a more diversified portfolio to leave a legacy for your family, there may be better options.

The biggest problem with Whole Life is that it is very expensive, and can divert funds which could be better utilized elsewhere. Most Term policies are flexible, and your most cost effective option to addressing your current coverage may be to talk to your original insurance carrier and see if a rider could be attached to address the shortfall. This would allow you to take advantage of any price breakpoints that they may have. If Additional coverage is not available, perhaps a new term policy would be the most cost effective solution to this problem.

As to a diversified portfolio, that is exactly what mutual funds are for. There are higher risk funds that have greater earning potential, but there are also funds that consist mostly of bonds and are fairly steady, but do not posses high earning potential, and there are thousands of funds in between. A well balanced portfolio usually has a little of several different types, depending on a persons risk tolerance and where they are in life.

Some other good alternatives to explore could be municipal bonds or annuities, both of which have guaranteed returns. I would be wary of anyone suggesting whole life as a great way to build an estate. Whole life is generally commissioned and is a highly lucrative product for those that sell it, it could be coloring your financial planners perspective. I would get all the information, then get a second opinion from someone who believes in the Buy Term and Invest the Difference strategy, compare the two and then make an informed decision from there.

Kathy 5 years ago

Thanks, James! I'm going to do some more poking around this site - I see some other pages you're following and that looks like some good, layman's information there. I'll do some more research. Life should be simple, eh? They make it so tricky with all these things that you legitimatly need, but then confuse the issue with all this extra "stuff." I appreciate you taking time to respond to me. God bless!

Chris 5 years ago

I'm in a pickle. I may be required to purchase Life Insurance (court ordered) to protect the Military Retirement payments to my former spouse. The final divorce decree required $130,000 Life Insurance (with the former spouse as beneficiary). In 2001 and I purchased a 10-term policy which has now expired. I discontinued the policy when it came to 'Term' because the premium was to increase from $160/mo to $1160/mo - and therefore I can be held in contempt and forced to apply for more coverage now.

I will be 68 years old in January 2012, planning to remarry, and have no mortgage. I am retired with a 10% Veterans Administration disability based on a number of service connected ailments including prostate cancer. I underwent a Radical Prostatecomy in 1995 and received Radiation Therapy in 2007. I visit the VA Urology Dept twice a year for PSA tests and maintain a low reading. Otherwise I am in (comparatively) good health for my age.

So, what's the chances of getting (any) Life Insurance coverage at all?

Since it may be court ordered and I have no choice, (no option to cancel or default)... would a Whole Life Policy be an option as an asset to my estate? I would have to maintain $130K policy payable to the beneficiary for (probably) 20 years (she is 65). I presume a 20 year Term policy might satisfy the court otherwise, but (Gee) at what monthly premium?

Obviously, on $50K fixed annual income solely from Pension and Social Security, I suspect I can argue to the court that $130K Life Insurance to secure the former spouse's military government support is cost prohibitive. Would that be so?

Thank you kindly for any wisdom you can provide.

grace 5 years ago

very informative, it reinforces my belief in term life and now i know what kind of insurance to take, thank you very much

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jamesrcooper 5 years ago from Rock Hill, SC Author

To Chris,

Sorry it has taken me so long to comment on this posting. It does sound as if you are in quite a spot. To be honest, I don't think your biggest problem is the type of life insurance you get, I think your biggest problem may be that most insurance companies will consider you to be uninsurable. Your best deal may be the one that you passed up.

At 68 years old, with no mortgage, and I'm assuming no or grown children, if it wasn't for the court order I would not really say that you needed much, if any, life insurance. Term probably would be very expensive now, but it still would be much cheaper than any cash value policy. I would think that the most affordable coverage for you right now would probably be an Annual Renewable Term, if you can qualify.

With your prostate cancer, your best bet may be to see what the AARP or the military can provide for you. Chances are that even if you do qualify, it will be expensive. You can try to claim a hardship to the courts, I wish you well with that approach.

Chris 5 years ago

Mr. Cooper, Okay, thanks for responding. I agree, the best deal was the 10 year term.. but I "passed it up"/cancelled it, because it was not a good deal anymore (the premium increased 10 fold at the end of 10 years). My plan is to reapply for annual renewable term and show the court that even the least expensive life insurance is cost prohibitive. So I hope the cost is sky high, actually. You've reinforced my thoughts, because I think this is my best chance of getting out of this life insurance requirement. The fact is... my former spouse can (now) well afford life without any spousal support or insurance support since she inherited her father's trust. Thanks again for responding.

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michaelwhitehouse 4 years ago from Southbury, CT

You took a relatively simple question of what type of life insurance is right for someone and made it terribly complex. The answer to the question of term or whole for most people under 55 is BOTH. Whole is good for some things, term is good for others. 10-20 years of income replacement done with whole life is like using a sledgehammer to drive a nail into a birdhouse. Conversely, term is simply the wrong product for final expense coverage.

Robb Cooper 4 years ago

You are absolutely correct that term insurance is not a good solution for final expense coverage, but Whole life is not the best solution either, Savings is. Someone under 55 years of age has plenty of opportunity, if investing correctly, to save the $10,000 it would require to bury themselves before they are no longer able to qualify for term insurance. Depending upon the renewal options on their term insurance, this could be as late as 95 years of age. Why would you pay through the nose for Whole Life just so that you would have enough to cover final expenses? This strategy would only make sense for someone who is late in life and has no savings, not for a 35 year old who could save $10,000 in a couple of years vs. having to pay for an overpriced product for the rest of their lives.

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michaelwhitehouse 4 years ago from Southbury, CT


What about a person who has to go into a nursing home or has expensive medical bills or dies with other debts. In that case, all of the assets can be taken to deal with those bills, leaving the family with the entire funeral bill to pay for themselves.

As for term to 95, my grandmother took advice like yours. She's 97 today. So much for that idea.

I actually wrote a hub on this topic that might interest you here

Robb Cooper 4 years ago

Annuity payments can not be seized either, and an annuity cost a fraction of what Whole Life does. The proper planning with the right kind annuity also guarantees that someone doesn't outlive their money. There is no benefit that Whole life provides that can not be provided for better with another vehicle, other than creating an instant estate for a person who is past retirement and has failed to save.

By the way, kudos to your grandmother for living so long. Must be healthy living. Hope she lives for many more. If she outlived her life insurance, and didn't save any money, it wasn't due to advice like mine. I teach people to become "self-insured" and to plan for the inevitable, tax ramifications and all, just like you have. I just happen to believe that cash-value life insurance is a heavily flawed and overly-expensive product, and there are much better ways to protect your income and save for the future.

lynx1 4 years ago

Hi Robb,

I will be 55 and have not taken any type of insurance, as I find it very difficult to decide.I am a teacher and can afford about 200 a month. What type of insurance should i take also women in my family tend to live long.

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jamesrcooper 4 years ago from Rock Hill, SC Author

The answer for anybody at the age of 55 is simple: Term. You are just going to get more bang for your buck. However, I have to point out that the philosophy of buying term and investing the difference only works if you invest the difference. If women in your life are notorious for long life, it is also important to plan for a long retirement and final expenses as well.

Some questions to ask yourself about life insurance:

Who other than yourself depends upon your income?

What debt do you have that others could be held liable for (mortgage, loans, etc)?

Do you have children living in the home? How old are they? If something happened to you would you want their education paid for?

How much do you have saved already?

What other needs may you have that you would want life insurance for?

All of these are factors that would effect your insurance need. Once you answer these questions, you know how much insurance to look for, rather than shopping by how much you can afford.

lynx1 4 years ago

hi Robb

Could you explain what you mean by investing the difference. I have no debts and have saved about 300000 plus the house. it is just my husband and I. We have paid off all student loans.

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jamesrcooper 4 years ago from Rock Hill, SC Author

Most financial experts (outside of the life insurance industry) will tell you that life insurance has one purpose, and one purpose only, to make sure that anyone who is dependent upon your income will be alright financially in case of your untimely death. However, once you have enough money saved that your loved ones will be alright, you no longer need life insurance. You will have become what is known as self-insured. The philosophy of buying term and investing the difference simply states that rather than buying over-priced cash value products that have lousy savings components attached simply to have "permanent protection", to buy low-cost term insurance to cover your financial needs while you need the protection the most, while simultaneously investing into savings programs outside of your life insurance that will give you far superior returns to the so-called "safe" investments inside of cash-value life insurance. You can usually get 4-5 times the amount of insurance, and 8-10 times the amount of savings with the same amount of money. This is why experts such as Dave Ramsey and Suze Orman recommend buying term and investing the difference.

Emilie 4 years ago

I'm 73, in good health, have no dependents, no spouse, and I want to provide a tax-free legacy for my married daughter. I have long term care health insurance, a $3,000 paid up insurance policy, a $12,000 group life policy, CDs in the amount of $7,000, savings of $3,000, monthly income of $2,400, and monthly expenses of $1,500. I own a crypt and have partially paid funeral expenses. I have had two annuities, each with a death benefit of $15,000. I have hated those darned annuities from the day I bought them (both have matured now)so I have made arrangements to combine them, buy a whole life policy of $50,000. The premiums will be paid from the annuities. My stock broker thinks I have made a mistake and should have bought term insurance. Now I'm suffering "buyer's remorse." It may not be too late to withdraw from the deal as I have not signed all the papers. Do you have any advice for me?

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jamesrcooper 4 years ago from Rock Hill, SC Author

I would have to agree with your broker about the Whole Life . You are at a point in your life where you have enough in savings and paid-up to cover final expenses, so you really don't need life insurance, and Whole Life as an investment is a terrible investment. So much of your cash value goes out in commissions and fees, and the return rates are terrible.

Check with your broker or accountant, but in most states annuities carry the same tax shelters that life insurance does. If you are not happy with the performance of your annuities, you can change the investments inside of them. If you are not happy with the contracts themselves, you can change annuities, there are hundreds of options to choose from.

You may also look at your CD's. Right now CD's are not even keeping up with the cost of inflation, so in that respect they are losing money for you. You may consider moving them into some conservative investments that will at least allow you to hedge against inflation.

Most of all, however, I would recommend sitting down with a professional and allowing him(or her) to guide you in these decisions, but if they suggest any kind of cash-value life insurance as part of the solution, find someone else, because they are putting their needs above yours.

Emilie 4 years ago

Thank you so much, James. Because of what you, my broker, and my tax guy have told me, I've already taken steps to extract myself from the insurance policy. You do a very valuable service. Keep it up! I'll continue to read your blog.

reagu profile image

reagu 4 years ago from Los Angeles

If you listen to Suze Orman, it's all about term life.

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jamesrcooper 4 years ago from Rock Hill, SC Author

You are correct Reagu. As a matter of fact, most financial experts such as Suze Orman, Dave Ramsey, and Crown Financial agree that Term Life is the better option. Most of the people who flock to the defense of cash value are people who have sold, or are currently selling it.

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monicamelendez 4 years ago from Salt Lake City

Very good stuff James. We went with term life in our family and are making sure that we invest the difference. Right now we're investing the difference in real estate because it makes a lot of sense right now in our area. We considered whole life but in the end we just didn't want to be locked into it

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jamesrcooper 4 years ago from Rock Hill, SC Author

Good for you! I would encourage you, however, to diversify your investments a bit further than real estate. Now is a great time to buy, and long term you will probably do quite well, but it is a horrible time to sell. You would not have wanted all of your eggs in that particular basket if you were looking to retire within the last 4-5 years. I encourage everyone that I work with to have investments in a variety of different industries, countries, and types of investments (barring Life Insurance as an investment, of course).

Mike 3 years ago

James, you do not factor taxes or fees in your "invest the rest" example? What happens to your example when you factor in a 28% or 33% tax brackett (which may go higher over next four years). Aren't there mgmt fees even on no-load mutual funds? Whole life cash value is tax deferred.

I am currently weighing my options and was given examples that were not as rosy as yours after taxes and fees.

Thanks for the alot to think about

jamesrcooper profile image

jamesrcooper 3 years ago from Rock Hill, SC Author

Very true Mike, you have to take all things into consideration including taxes and fees. Consider this, however, from the example above:

With the Whole life policy quoted above, if I passed away at the age of 65, my family would receive $150,000 that they would not have to pay taxes on. However, the $60,000+ that I have accrued in my cash value would be kept by the insurance company because the policy hasn't matured yet.

If I died at the age of 65 in the BTID scenario, my family would receive the $500k death benefit + whatever I would have accrued in my mutual funds, in this case the projected $142k+.

Let me ask you, which would you rather receive, the $150,00o that you don't have to pay taxes on, or the $642,000 that you do?

The cruelest trick of the Cash-value life insurance is that it never really belongs to you. If you need it while you are alive you have to borrow the money and pay interest on it (usually 8% compunded annually!) If you die before maturity (usually around age 95 or 100), the company gets to keep your cash value. Personally, I think this is a much higher price to pay than the 3-6% Front-end load and 1% management fees you pay on Class A mutual funds.

Tara 2 years ago

I've been thinking about getting better life insurance. I want to get a good plan so my family will be okay. It'd be nice to have a retirement plan as well.

Ashley 18 months ago

I want to get life insurance, just do my kids have some help if anything happens to me. I've never really thought about this before, so I appreciate all the information you've provided. I'm going to have to get a longer plan, I'm not quite old enough to just pass away yet.

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