Term life vs whole life insurance

What term life does

Term life insurance pays a fixed sum if you die within a fixed period — typically 10, 20 or 30 years. If you outlive the term, it pays nothing and ends. That is not a flaw; it is why it is cheap. You are buying pure risk transfer for the years when other people depend on your income.

• Level term keeps the payout and (usually) the premium fixed for the whole term. This is the default worth buying.
• Decreasing term reduces the payout over time and is often sold alongside a mortgage.
• Renewable/convertible options let you extend or switch to permanent cover later without new medical underwriting — worth understanding before you need them.

The design matches the actual risk profile of a normal life: your dependants' need for your income peaks while children are young and a mortgage is large, and falls as savings grow and the mortgage shrinks. By the time a 25-year term ends, most households no longer need it.

What whole life does

Whole life (and universal, variable and other “permanent” variants) covers you for life rather than a term, and splits your premium in two: part pays for the insurance, part goes into a cash value account that grows at a rate set or guaranteed by the insurer, tax-deferred in many countries. You can usually borrow against or surrender that cash value.

The consequences of that design matter more than the sales pitch:

• Cash value builds slowly at first. Early premiums are consumed largely by commission and cost-of-insurance charges, so surrendering in the first several years commonly returns far less than you paid in.
• Borrowing against it is a loan. It accrues interest, and unpaid loans reduce the death benefit.
• In most designs the cash value is not paid in addition to the death benefit — beneficiaries receive the face amount, and the accumulated cash value is what funded part of it. Check the specific policy, because designs differ.
• Illustrations are projections. Non-guaranteed dividend or crediting rates shown in a sales illustration are not promises. Read the guaranteed column.

Why the price gap is so large

Illustrative US retail pricing for a healthy, non-smoking 30-year-old buying $500,000 of cover:

The 10x gap is not a scandal — it is two different products. Whole life is priced to pay out with certainty (everyone dies eventually) and to fund a savings account; term is priced on the probability of dying inside a fixed window, which for a healthy 30-year-old is low.

When permanent cover is defensible

Whole life is oversold, not useless. It can be the right tool when:

• You have a lifelong dependant — for example a disabled child — whose need does not end when a term would.
• There is a genuine estate liquidity problem: an illiquid business or property that heirs would otherwise have to sell quickly to pay taxes or settle claims.
• Your country's tax code gives the cash value treatment you cannot get elsewhere, and you have already used the more efficient accounts available to you.
• You are uninsurable later and a convertible term policy gives you a route to permanent cover you will actually need.

If none of those describe you, term is very likely the answer.

How much cover, and for how long

Two common methods, both rough:

• Income multiple: 10–15x annual income. Fast, crude, ignores your actual obligations.
• DIME: Debts + Income replacement (annual income x years of support) + Mortgage + Education, minus existing savings and cover. More work, more defensible.

The life coverage estimator runs DIME on your numbers. For term length, a reasonable default is “until the youngest child is financially independent, or the mortgage ends, whichever is later”.

Questions to ask before signing anything

1. Is the premium guaranteed level for the whole term, or can it be re-rated?
2. Is the policy convertible to permanent cover without new medical underwriting, and until what age?
3. What exactly is excluded — suicide clauses, hazardous activities, undisclosed conditions, travel to specific countries?
4. What is the contestability period during which the insurer can review your application?
5. For permanent cover: what is the guaranteed cash value at years 5, 10 and 20 — not the illustrated one — and what are the surrender charges?
6. How is the salesperson paid, and does the recommendation change if you ask that question?

Get quotes from more than one insurer. Underwriting differs enough between companies that the same person can be priced very differently for identical cover.