Term Vs Whole Life Insurance

Life insurance can be a confusing topic.  Should adults get term life insurance or whole life insurance?  You might also be wondering how large of a policy to get & how much life insurance costs.

I will look into these various questions today to help you decide which life insurance plan is the best option for you and your family members.

If you have a bank account, you most likely receive occasional offers to buy life insurance.  Nobody on this planet will live forever but you shouldn't buy the first life insurance offer you get.

I'll be the first to admit that talking about death, especially mine, is creepy.  No matter our age, we always want to think we are that invincible 20-year old.  Because we are all human, even the invincible have vulnerabilities.  I'm sure we can all think of a young person who had an untimely death & the question is asked “Now What?”.

Expected or not, death is always shocking no matter the age. Life insurance can help you leave a legacy for your loved ones.

You might want life insurance if:

  • You are a young family with little money in savings to cover funeral costs
  • Have mortgage debts (or other debts) that your surviving spouse or children would need to payoff
  • Do not want to leave large medical bills for your family to pay

Remember that the intent of any insurance is not to use it.  We pay monthly premiums to protect us or our belongings from total loss.  It's not fun paying hundreds or thousands of dollars each month for a service you may never use, but you are happy to have it when something unexpected occurs (i.e. unexpected illness [Health Insurance], fender bender [Car Insurance], or windstorm that damages your roof [Homeowner's Insurance]).

Life insurance is a way to provide for your family if the unexpected happens. 

I have a $250,000 policy that will not force my wife to immediately find a full-time job to pay the bills, in case the worst happens to me.  I'm not planning on dying. Hopefully my wife will not need to redeem that policy.  We don't have that much money in savings, so the policy would cover the associated expenses with having a funeral and any potential medical bills.

What Is Life Insurance?

You might be very familiar with life insurance or maybe not.  Your association with life insurance might come from the tv murder mysteries when one spouse arranges for the untimely death of their partner because they had a $3 million policy and were essentially worth more dead than alive.

Life insurance pays a defined amount of money to a beneficiary in case the policyholder dies as long as the policy is active.  For example, my life insurance policy is worth $250,000 for 20 years.  I pay $16 each month for the next 20 years.  If I die before that 20-year term ends, my wife will receive $250,000 in benefits.  If I am still alive in two decades, we don't receive a dime but I still get to wake up next to my wife each morning.

Remember that the whole intent of insurance is not to use it, because it means you are having to spend additional money on whatever needs repaired or remedied.  Insurance reduces the costs associated with health issues or property loss.  But your future premiums might increase, depending on the circumstances, as the insurance company will temporarily view you more at-risk of filing a future insurance claim.

Term Life Insurance

This is most likely the type of life insurance you have through your employer, if they even offer life insurance at all.

Term Vs. Whole Life Insurance
Imagine Your Life As A Circle & You Want To Protect A Portion Of It

If you are an adult, this is the only affordable option (in my opinion) to purchase life insurance.  A term policy is what I briefly described in the previous section.  As opposed to whole life insurance (I will describe later in post) that can be redeemed for cash value, term life insurance cannot be “cashed out.”  If I am still alive when my 20-year term ends, I gave the insurance company $3,840 I will never see again. But I'm still alive.

Yes, that money could be used for investments that would pay dividends or compound in value.  To a certain extent, my wife & I think the concept of life insurance is silly.  Our ultimate goal is to not have it at all, by squirreling enough money away in savings & investments.  Until then, we will keep our policies open.

How Much Does Term Insurance Cost?

Like any insurance, the monthly premium is based on several factors.  For life insurance, your premium is based on several factors including: age, medical history, and tobacco use.

A 40-year old will have higher premiums than a 25-year old.  Why?  Statistically, the 40-year old is more likely to die than a 25-year old.  If you currently use or have used tobacco in the past, your rates will be higher than a non-tobacco user.

In 20 years, when I'm 50 years old, the monthly premium will be higher than my current policy at 30 years old.

I pay about $16 each month right now for $250,000 coverage for a 20-year term.  Having a larger policy amount ($1,000,000 instead of $250,000) or a longer-term (30 years instead of 20 years), I would have to pay a higher premium.

I encourage you to get a free online quote to compare your options.  It will only take a few minutes (even if you're not good with computers) and you might be surprised how cheap it is.

How Large Of A Policy Should I Get?

You will be the only one able to answer this question.  It ultimately depends on your budget & the most you are willing to pay each month.

Financial talk show host Dave Ramsey & personal finance magazine Kiplinger's recommend having a term policy up to 7 times your annual salary.  

Although I have the larger policy in our family, my wife also has a “small” $50,000.  She is mostly a stay-at-home mom, but with the average funeral & burial costs currently estimated at $20,000, the cheap monthly premium on that policy was worth the cost.  Until we become debt-free by paying for our house, we haven't budgeted $20,000 for such matters.

Whole Life Insurance

This option is only an affordable for children.  For our infant daughter, we opened a $20,000 policy for about $8 each month, just enough to cover funeral costs.  The beauty of whole life insurance is that the policy slowly gains cash value.  So if you quit making payments, you can at least get a small return on investment (unlike term insurance).

Term vs Whole Life Insurance
Whole Life Insurance Never Expires

When I say whole life insurance is only affordable for children, I mean it.

That $16/month, $250,000 term policy would cost me an estimated $129 each month for a whole policy.  Personally, I would rather have a term policy and invest the difference each month.  That $113 difference each month translates to $27,120 over a 20-year term.  If invested wisely, the earnings mean you won't need a life insurance policy once your children move out or you are debt-free!

Term vs Whole Life Insurance
It's Only 4 Steps!

How To Open A Life Insurance Policy

Opening a life insurance policy isn't as simple as clicking the computer mouse a few times and providing a credit card number.  It is a multi-step process that involves human interaction, in most instances.

I recommend that you start getting a quote with your current insurance provider that you have your car insurance, homeowner's, renters, or automobile insurance.  Simply because you might get a multi-policy discount.  It might only be a couple dollars each month, but something is better than nothing.

Step 1: Initial Application Interview With Insurance Agent

This step might either be done in person or on the computer.  It depends how you apply for insurance.  This step basically asks initial questions like: your age, height, tobacco use (if any), medical history, annual salary, and how much coverage you want.

If you apply in-person it can either be at the insurance office or the agent might come to your house.

Step 2: Underwriter's Interview

This is a phone consultation.  It might take 10-15 minutes at the very most and is conducted by the Underwriting Department of your respective insurance agency.  They will ask a lot of medical questions.

Such as:

  • How much alcohol or tobacco do you consume on a normal basis?
  • Have you ever been suicidal or suffered from depression?
  • Have you ever had the following medical conditions…?
  • Have you applied for life insurance & been denied within the last 12 months with another company?

The interview process is very thorough.  Remember that it's insurance and the companies remain in business by hedging risk.  The riskier you are (according to the insurance company standards), the higher your policy premiums will be.

Step 3: Medical Exam

For this step, the insurance company will have a trained nurse either come to your home or another location to provide a FREE  exam.  I bring this up because I had to take the exam to qualify for lower rates (or to get coverage at all) their nurse will need to check your weight, waist size, and possibly some other tests.

For my $250,000 term policy, I needed to produce a blood sample & a urine test.  My wife with a $50,000 policy only needed to have her mouth swabbed to check for tobacco use.  Each insurance company has different policies so you may have less or more tests, depending on your policy amount & medical background.

About seven days after I had my exam, the medical company mailed me a copy of my bloodwork test results.  Although this doesn't take the place of an annual medical physical, these results were very informative.

Step 4: Final Quote

At this step you will receive your final quote, once the insurance company receives you medical results.  At this time you can either decide to accept the premium price and begin coverage or say no.

Is Life Insurance For Everybody?

The simple answer to that question is, no.  Dave Ramsey doesn't think life insurance policies are necessary if you are 57-years old, debt-free, no children at home, and have over $700,000 in investment assets.

I agree with him.  As I mentioned earlier, it's silly to pay money for a product when we all know we are going to die eventually.  Young people, like my wife & I, should strongly consider life insurance because we have young children and a mortgage.  If I died tomorrow, my spouse and 9-month old would have to rely strongly on family and friends for immediate support.  Plus, my wife would have to quickly find a way to replace my income.

Monthly premiums are very reasonable in your 20's & 30's.  But the rates increase noticeably for each decade of life.  At some point it becomes more lucrative to invest and pocket the earnings, instead of handing a monthly check over to the insurance with no guarantee that your loved ones will ever get reimbursed (assuming you outlive your term policy).  That's a good thing, I might add.

My Recommendation

Recommendation #1: Whole Life Insurance For Each Child 

I recommend opening up a whole life policy for each of your children with a $15,000-$20,000 policy to cover death and burial costs.  For less than $10 each month, this is the most affordable option to protect your children & their future spouse from the costs of a funeral.  If you want to have a higher policy amount than do so.  I simply view life insurance as a way to help cover the costs associated with death and provide temporary relief for the surviving family.

Recommendation #2: Term Policy For Each Parent

It doesn't have to be a large policy.  I never plan to have a million dollar policy for my wife or myself.  We view life insurance as a way to cover the costs of a funeral, medical bills, and enough money to pay off the mortgage & other loans so my wife won't have to immediately get a full-time job to keep the bill collectors away.

Your employer might offer insurance at a discounted rate that ranges anywhere from one to five times your annual salary.  Obviously if you leave your employer (as I did), this policy goes with them and you will not receive a refund.  So you might want to consider a personal policy to protect against any potential career transitions.  Plus, you might be able to get a larger coverage amount than your employer will offer.

Summary

I hope I have helped dispel some of the confusion about life insurance.  You might view it as a “necessary evil” like other insurance products, but it is a blessing to have if needed.

We can all think of husbands & fathers whose life ended rather unexpectedly.  By having life insurance, it gave their surviving spouse and children some peace of mind as they start the next chapter of life.

If you are sick, it might be too late to get a policy.  So you need to open one when healthy.  Nobody knows what life will bring from one day to the next, except that the sun shall rise.

Enough morbid talk already!  I encourage everybody to be responsible spouses and parents.  Life insurance is one way to provide financial security if times of uncertainty arrive.

Do you or your spouse have a life insurance policy?  Did (or do you plan to) you get a policy for your children?


Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.