If you are thinking about buying life insurance, you have probably heard of both term life insurance and whole life insurance. Before you choose one or the other based on what you've heard or what your insurance agent says, you should know what "term" and "whole" mean and what the pros and cons of each are (and how these pros and cons will affect you).
First, we have life insurance with a set term. It gives coverage for a certain amount of time, which can be up to 30 years. It costs a lot less than whole life insurance, and policyholders can choose between level-term premiums and premiums that are renewed every year. With level-term premiums, the premiums stay the same for the whole life of the policy. With annual renewable premiums, on the other hand, the premiums go up as the policyholder gets older.
Next is whole life insurance, which combines term life insurance with an investment component. Whole life insurance has two parts: the mortality charge, which pays for the insurance coverage, and the investment part, which earns interest and is supposed to work like a savings account. But as the policyholder gets older, the death charge goes up and the investment part goes down. Also, the cash surrender value, which is the amount you would get back if you cashed in your policy, is not always what it seems to be. It goes up and down with the markets, which makes it hard to compare to reality.
In the end, if you are on a tight budget and want a good life insurance policy that won't break the bank, term life insurance is probably your best bet. It's not too expensive and doesn't give you more coverage than you need. But if you have enough money to buy whole life insurance, you can use it to plan your estate by paying your estate taxes with the money instead of leaving your family to fight with the government.
Another problem is that whole life insurance is very expensive, so if you're on a tight budget, you might not be able to get all the insurance coverage you need.
People with a lot of money sometimes use whole life policies as a way to plan their estates. They can set up an insurance trust so that when they die, the money from the policy is used to pay their estate taxes. That can keep their heirs from having to pay Uncle Sam a lot of money to settle the estate.
