Should I get a term life insurance policy, or a cash value whole life policy?

This is a much-debated question in many financial circles.

Let’s start with the basics.

The purpose of insurance is to transfer certain risks from you, over to the insurance provider. Generally, insurance is best-reserved for “big-ticket” items to cover losses that, without an insurance policy in place, would be difficult to handle financially.

That’s why home insurance is so critical. If your house goes down in a fire, you’ll suffer a huge monetary loss. So, to avoid that big hit, you can acquire insurance and transfer the risk to the insurance company, in exchange for monthly premiums that will cover you in the event of this huge loss.

Life insurance is another terrific way to transfer risk of loss. It’s one of the most important purchases you can make in terms of securing the financial future of your loved ones.

The general purpose of life insurance is to replace the income of a loved one and provide for the family that relies on that income. It provides peace of mind that should the loved one pass, the surviving family will be taken care of financially.

What is term insurance?
Term life insurance, as the name suggests, provides coverage for a specific period, generally between 10-30 years. These policies do not generate any cash value or allow borrowing against the policy. Their strict purpose is to provide insurance.

What is a cash value whole life policy?
This type of policy not only provides insurance coverage, but also allows the build-up of cash. As such, it’s utilized as another way for folks to supplement their income in retirement.

** Cash value policies can also be an effective option to pay for college education. 529 Plans are the most common vehicle used by parents to pay for their kids' education. However, colleges and universities will count cash accumulated in 529 Plans among your family's assets when calculating financial aid eligibility. Whereas money amassed in a cash value life insurance policy is not counted in the asset calculation for financial aid qualification purposes. Because of this, a cash value policy may be a valuable strategy to minimize out-of-pocket education costs.

Which should you get?
As with most financial moves, there is no one perfect answer. In fact, the solution for you may just be a combination of both types of policies.

For most, a term insurance policy is sufficient in that it allows a family to acquire life insurance in exchange for very low premiums. These families may then decide to do their investing by way of company retirement plans (401k’s, pensions, etc.) or other means (IRA’s, etc.) rather than acquiring cash value whole life policies.

However, there are others who love the flexibility and options provided by cash value policies. They’ll tout the benefits of having insurance beyond the fixed lifespans of term policies, as well as opening options for tax-free access to cash in retirement. The latter is frequently used by financial planners to help diversify their clients’ investments, allowing for more strategic income options during retirement. Cash value policies can also provide long-term care benefits, among other items.

In short, if funds are limited and insurance is the primary motivator, a term policy is likely best for you. If you have some surplus funds available, you may want to entertain the idea of a cash value policy.

In the end, we always recommend speaking with a qualified advisor who can provide unbiased quality advice.