When is whole life insurance better than term life insurance?

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When is whole life insurance better than term life insurance?

Term life insurance is a good option for most people. It covers the needs of 80-90% of people: a death benefit to financially protect your family.

But that leaves 10-20% of people who would benefit from a different type of life insurance — permanent life insurance. Specifically, whole life insurance. Whole life insurance can be complicated, but useful for people who have specific financial needs. It provides a forced savings vehicle, a cash value component for complex financial situations, and policy flexibility.

Whole life insurance basics

You can learn more about whole life vs. term life insurance here, but as a quick primer, there are two main things you need to know:

  • Whole life insurance lasts for as long as you make premium payments. This is a feature of permanent life insurance, no matter the type (whole, universal, variable, or others). Unlike term life insurance, which expires after a certain amount of time, you can keep whole life insurance for as long as you like, and surrender it if you don’t want it anymore.
  • Whole life insurance has a cash value component. When you pay a whole life insurance premium, it’s split between the life insurance portion and a cash value investment component. You can do many things with the cash value of a whole life insurance policy, like borrow from it. Term life insurance does not have a cash value.


    Because of the cash value and fees, whole life insurance policies can cost much more than term life policies. But sometimes, it’s worth the extra cost.

When whole life insurance is better than term life insurance

So what are the circumstances when you’d be better off with a whole life insurance policy as opposed to a straightforward term life policy? As you might expect, they revolve around the cash value.

You need a savings vehicle

Americans aren’t good at saving. In 2016, almost half of families had nothing saved for retirement, per the Economic Policy Institute. So if you need life insurance, and to get better at saving, you can kill two birds with one stone with whole life insurance.

Whole life insurance is a forced savings vehicle, like a house. You don’t have to choose to invest; like a mortgage, it’s tied to something you’re already doing. If you’re bad with money and don’t want to add an extra task to your plate, consider a whole life policy.

Now, there are some pretty big caveats. There are high fees in the early years of a whole life policy, and many are dropped before they can recognize big returns. And you’ll often hear the refrain “buy term and invest the rest,” which means buying a cheaper term life policy and investing the cost difference in a more substantial savings account.

But then you have to actually invest the rest. And we’ve established people aren’t very good at that. If you need to be forced into savings, look into a forced savings vehicle — like a whole life insurance policy.

You need the cash value component

Life insurance death benefits are, for the most part, tax-free. That makes them handy in situations where a large sum of tax-free money is a huge boon. (Yeah, I know, a large sum of tax-free money is always a huge boon. But here’s where you can use it for something specific.)

  • The estate tax only affects a small number of people, those who estate is valued at over $5.69 million. But if you’re in a situation where you have to pay it, that money isn’t going to your loved ones. Complex financial situations like this are textbook examples of when the cash value comes in handy.
  • If you have a special needs dependent, you’re going to want to make sure they’re taken care of if you’re not around. A permanent life insurance policy is a good vehicle to set up a special needs trust because of the guaranteed growth of the cash value (usually around 4% for whole life insurance policies).

You want policy flexibility

Dividends paid from a whole life insurance policy can be put back into the policy itself, allowing you to buy extra coverage and increase the benefit. That makes it easy to get additional coverage later in life. (With some types of permanent life insurance, you can even use the cash value to pay for the policy premiums, assuming your return is high enough).

This is just scratching the surface of when a whole life policy can come in handy. And you have options beyond buying a whole life policy. You can get a term life policy with a conversion rider, which means it’ll turn into a whole life policy at the end of the term. You can also use other permanent cash value policies for other situations.

The important thing is to talk to a financial advisor or licensed insurance agent. Because these policies are so much more expensive than term life, they’re not necessary for most people, especially those who just want a simple life insurance policy. But if you think you might benefit from one and it’s in your budget, talk to a professional today.

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