When Whole Life Insurance is a Better Choice Than Term

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You’ve probably heard the saying, “Buy term life insurance and invest the difference.” The “difference” in this recommendation is the difference between what you would pay for whole life insurance versus term life insurance. That difference is substantial. Whole life insurance is generally many times more expensive than term life insurance.

For that reason, term life insurance is usually the better strategy. But are there times when whole life insurance is ever a good idea?


You’ve probably also heard the saying, Never say always; never say never, and so it is with the whole life versus term debate. There actually are times when whole life insurance makes more sense than term.

Here are a few of them:

When Do You Need Permanent Life Insurance?

In most cases, people buy term life insurance because they anticipate that their need for life insurance will be temporary. For example, they may need it only until their children reach adulthood or the mortgage on a house is paid off. There may also be the expectation that once the original term policy expires, they will simply take out a new term policy. Term life works brilliantly in any of those situations and many more.

But what if you anticipate a permanent need for life insurance? There are several situations where this could be the case:

  • You have a nonworking spouse, so there will always be the need for at least some life insurance.
  • You may have certain health conditions or predispositions that can make obtaining a new term policy in the future expensive or impossible.
  • You may have insufficient assets to provide for your loved ones in the event of your death, making life insurance necessary for the rest of your life.
  • You may simply feel better knowing that you have permanent life insurance coverage.

Any one of these considerations could make whole life insurance a sensible choice.

If You Can't Save and Invest Money Otherwise

Let’s get back to that buy term life insurance and invest the difference recommendation for a moment. It’s fine to say that — and it certainly sounds right at the time — but how many people actually do invest the difference? Certainly not everyone.

Some of us are naturally inclined to save and invest money, but not everyone is. If you are not a saver, a whole life insurance policy could be one of the best strategies you can implement. It is a life insurance policy with an attached savings provision, that allows you to take care of two important financial needs with the same monthly premium.

Whole life insurance policies put some of your monthly premiums into the policy’s cash value. As the cash value grows, it often pays you dividends on the balance just the way stocks do. By taking a whole life insurance policy, your cash value can grow quietly, in much the same way that a payroll deduction–based savings plan does. It’s an excellent strategy if you have no other capacity to save and invest money.

For Your Children

Whole life insurance policies can work especially well when it comes to young children. There are two fundamental reasons for this:

  1. Locking in low premiums for life — Even for children, whole life is much more expensive than term is. However, given their young age, the premiums for children’s policies are very low. What’s more, on a whole life insurance policy you lock in that low rate for the rest of your child’s life. That will be a premium rate that they will not be able to match with the cheapest term policy by the time they are old enough to have children themselves.
  2. The investment provision — We discussed the investment provision above, but this can be especially beneficial when it comes to children. Imagine taking out a whole life insurance policy for a newborn baby — even on a relatively small policy, it can be worth many thousands of dollars by the time the child turns 18. This could be money for a college education or the foundation of an investment portfolio early in life — in addition to the basic life insurance coverage.

Combining Retirement Savings With Life Insurance

This is in the same category as the concept of combining life insurance with an investment provision, but it creates a special goal. In fact, whole life insurance actually has some significant advantages when it comes to retirement planning.

Much like a tax-sheltered retirement plan, the cash value of a whole life insurance policy grows on a tax-deferred basis and can even be taken out tax free. This is because dividends paid on the policy are considered to be a return of premium and not taxable the way other dividends are.

The only time you’ll have to pay tax on your life insurance dividends is when the total dividends you receive are greater than the total dollars in premiums that you paid for the policy. In addition, if there are income taxes, you don’t have to pay them until your life insurance policy is surrendered and you receive the cash value.

Still another retirement benefit of a whole life insurance policy is that many insurance companies will allow you to surrender your policy and use the cash value to purchase a life annuity. If there is no significant income tax obligation, this can be an outstanding retirement planning strategy, providing you with an income stream for life.

Forget about all of the clichés surrounding whether or not to purchase whole life insurance. If you are in a situation similar to any of those discussed above, a whole life insurance policy may be the better choice for you.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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