Determining If Whole Life Is Right for You

Selecting insurance coverage is never a simple decision. Whether you’re purchasing auto insurance, health insurance, or life insurance, you face complex choices that will have a lasting impact on your life and your finances. With life insurance, one of the most common dilemmas consumers encounter is determining if whole life or term life coverage is the better option. Of course, the answer will depend entirely on your individual circumstances; there is no one-size-fits-all solution with life insurance policies. In what follows, we’ll provide you with a few questions that you can ask yourself to determine if a whole life policy is the appropriate coverage for you.

1. How old are you? If you are young, healthy, and have a while to go before retirement, term is usually the better option. Term policies for people under age 50 tend to be very reasonably priced. Moreover, purchasing a cheaper term policy will allow you to invest what you save on premiums. On the other hand, if you are over age 50, you may not even be able to find an insurer that will issue you term coverage. Some insurers have a maximum age for term policyholders, and after you reach that age, new policyholders can only buy whole life coverage.
2. Are you diligent about saving? Whole life is essentially a forced savings plan because a large part of your premiums goes toward investments. Your policy will build cash value over time, and you will later be able to withdraw from or borrow against this cash value. Therefore, if you lack the discipline to save on your own, whole life may be worth the extra cost. Conversely, if you are diligent about saving for retirement and other life goals, you don’t need the added expenses of a compulsory savings program.
3. What can you afford? Whole life comes with an array of fees, commissions, added premiums, etc. that make it rather expensive to purchase. Life insurance agents make the biggest commissions on whole life policies, so more of your money will go into their pocket. If you have a tight budget and can’t afford to spend much on life insurance, whole life coverage probably isn’t for you. For now, you might purchase a term policy with a conversion option and change it to a whole life policy when your financial situation improves, if you wish to do so.
4. What kind of an investor are you? For very conservative investors, whole life is not a bad choice. As long as you don’t purchase whole life exclusively for investment purposes, whole life will serve investors averse to risk well. Keep in mind, though, that the returns on whole life policies are very modest and not guaranteed. Your insurer will invest your premiums conservatively, which means your return on investment will be small. If you are willing to invest in endeavors with more risk and higher potential returns, then whole life is not for you.
5. How long do you need coverage? If your children will be finished with college and out of the house in the next ten years, it doesn’t make sense to buy an expensive whole life policy that will provide coverage for the rest of your life. However, if you have people who will be depending on you for quite some time (such as aging parents or a child with a disability), you may want the permanency of whole life coverage.