When you start looking at life insurance, one of the standard dilemmas is whether to go with whole life or term life insurance. This is one of the most hotly debated subjects in the whole world of personal finance. You really want to be well-educated before making a decision one way or the other. I know you’re always hunting for really cheap insurance, but you want to take your research further than that.
Whole life combines the death benefit that we associate with life insurance with a savings component. Back in the 1960s and earlier, when mutual funds were few and discount brokerage services were yet to be invented, the savings features of a whole life policy appealed to many small investors. However, with a plethora of investment options open to the modern small investor, the traditional whole life policy holds less of an allure.
Insurance companies have tried to keep up with the competition, coming up with a “universal life” or “variable life” package that takes the savings component of a whole life plan and lets it earn stock-market rates, acting a bit like a stock mutual fund. The drawback to such plans is that they generally have higher yearly fees and higher commissions than mutual funds, especially no-load mutual funds that you can buy directly from the mutual fund without paying a commission.
Conversely, term life just takes care of the death benefit for the term of the insurance. If you don’t kick the bucket during the term of the insurance, you get zero. However, since there is no savings component, it is much cheaper than whole life plans.
The stock phrase in personal finance on the whole life vs term life insurance debate is “buy term and invest the difference.” The investment money you’d put in a whole-life policy would deliver a better bang for the buck in a stock mutual fund, or the beginnings of a stock portfolio if you have an interest in making your own stock-picking decisions.