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Term Life vs. Whole Life Insurance

Retirement and your financial future. Hmm . . . you’ll get around to thinking about it one day. And life insurance? That too.  

But here’s the funny thing about life—we can’t control it. Things happen that we never see coming, and there’s very little we can actually plan for. That’s why it’s so important to get things in place right now that we can control—like life insurance.

It doesn’t matter if you’re right out of college or knocking on the door of retirement: You need life insurance, and there’s no time like the present to get it.

Term Life Insurance vs. Whole Life Insurance: What’s the Difference?

When you boil things down, you really have two options when it comes to life insurance—term vs. whole life. One is a safe plan that helps protect your family and the other one, well, it’s a total rip-off.

What Is Term Life Insurance?

Term life insurance provides life insurance coverage for a specific amount of time. If you or your spouse passes away at any time during this term (usually 20–30 years), your beneficiaries (those you’ve selected to inherit your money) will receive a payout from the term life insurance policy.

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How much life insurance do you need? Find out with our free calculator!

Term life insurance plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you or your spouse passes away. In the simplest of terms, it’s not worth anything unless one of you were to die during the course of the term. Then that’s when you receive money.

Of course, the hope here is you’ll never have to use your term life insurance policy at all—but if something does happen, at least you know your family will be taken care of.

What Is Whole Life Insurance?

The premiums on whole life insurance (sometimes called cash value insurance) are generally more expensive than term life for a couple of reasons.

Whole life coverage lasts throughout your entire lifetime. It might sound like a good thing to have life insurance coverage for your entire life. But here’s the truth: If you practice the principles we teach, you won’t need life insurance forever. Ultimately, you’ll be self-insured. Why? Because you’ll have zero debt, a full emergency fund and a hefty amount of money in your investments.

Whole life insurance costs more because it’s designed to build cash value (which means it tries to double up as an “investment” account.) But keep in mind that a life insurance policy shouldn’t be an investment or money-making scheme—it’s simply meant to provide security, protection and peace of mind for your family should the unthinkable happen.

It’s like Dave says in his book The Complete Guide to Money, "Life insurance has one job: It replaces your income when you die."

There are far more productive and profitable ways to invest your money than using your life insurance plan. What sounds like more fun to you—investing in growth stock mutual funds so you can enjoy your retirement or "investing" money in a plan that’s all based on whether or not you kick the bucket? We think the answer is pretty easy.

Cost Comparison of Life Insurance

Let’s say we have a friend called Greg, who’s in his thirties and has $100 per month to spend on life insurance. He shops around and finds he can purchase an average of $125,000 in insurance for his family. From the whole life insurance agent, he’ll probably hear a pitch for a $100 per month policy that will build up savings for retirement, which is what a cash value policy is supposed to do.

But if he buys 20-year term life insurance with coverage of $400,000, it will cost him only about $18 per month instead of $100.

So, if Greg goes with the whole life, cash value option, he’ll pay a hefty monthly premium. And the part of his premium that isn’t going towards actually insuring him, goes towards his cash value “investment,” right? Well you’d think, but then come the fees and expenses . . .

That additional $82 per month disappears into commissions and expenses for the first three years. After that, the cash value portion will average a low return per year compared to if he’d invested it elsewhere.

Worse yet, the savings he does manage to build up after being ripped off for 20 years won’t even go to his family when he passes away. Greg would have needed to withdraw and spend that cash value while he was still alive. Talk about pressure! The only benefit his family will receive is the face value of the policy, which was $125,000 in our example.  

But what if he went with the $18 term life policy and invested the $82 he saved each month for 20 years in good growth stock mutual funds? With a 10% rate of return, that would turn into about $62,000. That’s a lot of bang for your buck!

How Much Term Life Insurance Do I Need?

You should purchase a term life insurance policy for 10–12 times your annual income. That way, your salary will be replaced for your family if something happens to you. You can run the numbers with our term life calculator.

And don’t forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Think about what you would pay in childcare and home upkeep costs if the stay-at-home parent was gone! No matter what, you both need term life insurance.

Want to make sure your family is covered no matter what happens? Check on your coverage before it becomes an emergency. Take our 5-minute coverage checkup to make sure you have what you need.

How Long Do I Need Term Life Insurance?

Dave recommends you buy a policy with a term that will see you through until your kids are heading off to college and living on their own. That might be anywhere from 20 years if you already have children to 30 years if you don’t have children or aren’t finished adding to your family yet.

A lot of life can happen in 20 years.

Let’s say you get term life insurance when you’re 30 years old. You and your spouse have an adorable little two-year-old toddler running around. You’re laser-focused on paying off all your debt (including the house) and look forward to investing and retirement planning in the future.

Fast-forward 20 years—you’re both in your 50s and that little pint-sized toddler is now a 22-year-old college grad. The years went by fast, didn’t they?

But look where you are! You’re debt-free (the house and everything), and with your 401(k), savings and mutual funds, you’re sitting at a cool net worth of $500,000–1.5 million! The years were good to you, and it’s all because you had a plan.

Since you were able to build up your net worth, you have peace of mind. At this point, (even without life insurance) if something were to happen to you or your spouse, the surviving spouse would be able to live off your savings and investments. Congratulations, you’ve become self-insured! When you become more financially secure, you have less and less of a need for life insurance.

Don’t Wait Until You Need Life Insurance to Get It

The truth is, we can’t see the future and aren’t promised tomorrow. Life is precious! And the ideal time to buy life insurance is when you’re young and have a clean bill of health. Especially since life insurance companies are all about weighing the risks of the person purchasing the policy.

Zander Insurance is the only company that Dave Ramsey recommends for term life insurance. Don’t let another day go by without being protected. Start here to get your term life insurance quotes.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

How much life insurance do you need?

Get Your Numbers

How much life insurance do you need?

Find the best term life policy for you with our free life insurance calculator.
Get Your Numbers

How much life insurance do you need?

Find the best term life policy for you with our free life insurance calculator.
Get Your Numbers