If you shop for life insurance, you’ll find that insurance brokers will give you a hard sell for whole life insurance, over term life insurance. Right there, that should tell you something. The commission brokers can earn for whole life insurance are considerably heftier than for term life insurance.

But let’s take a look at the differences between the two types of life insurance, and you can decide for yourself which is best for you. Hint: its term life insurance.

Term or Whole Life Insurance?

The major difference between the two is that a term life insurance policy simply pays the beneficiary the face amount of the policy upon the death of the insured. Whole life insurance, on the other hand, combines a term policy with an investment component — the investment takes the form of stocks and/or bonds. The value of the policy grows (or diminishes) based upon the performance of the investments. And within the realm of whole life insurance, you have to choose between traditional, universal, and variable policies.

So, as you can imagine, comparing quotes for term life insurance is considerably easier than comparing quotes for whole life insurance. With term insurance, you have the face value, the number of years for the term, and the monthly payment amount. It’s a very easy calculation. With whole life insurance, you have to somehow determine the future performance of the investment team that has responsibility for making your money grow.

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The track record for whole life insurance investments is not particularly good. You’re better off seeking out more successful managers of your retirement money, keeping it separate from any life insurance needs, and then go buy the cheapest term life insurance policy you can find from a highly rated, reputable life insurance company.

Aside from the simple logic of keeping your retirement investment separate from your insurance policy, you should know that whole life insurance policies could be very expensive. The policies include high fees and commissions, which can be as high as three percentage points of your annual return, if there is a return. In addition, the upfront commission that the broker gets kicked back may run as high as your entire first year of premiums. Of course you won’t hear about this commission, as it is hidden within the cost structure. And just try and determine how much of your premiums go toward your insurance and how much toward the investment.

Term life insurance – the right choice

If you’re in good health and young, and under 50, term life insurance is cheap. Year by year, as you get older it becomes more expensive for obvious reasons. And, if you have health issues, you are overweight, you engage in unhealthy habits such as smoking, you’ve had a DUI, or you engage in hazardous activities such as skydiving, your rates will be higher. (Of course, if you are a smoking, drunken, fat skydiver you probably aren’t that concerned about your longevity or the welfare of your wife or kids anyway.) When you apply, you’ll be asked a battery of questions, whose answers will affect the initial premium before you go for medical underwriting.

But what if I can’t get term life insurance?

If you’re in your 60s or beyond, you may not have an alternative but to buy a whole life insurance policy. Insurance companies do not like to sell term life to seniors. Frankly, the premiums would have to be way too high, to the point that people could not afford them, in order to take the risk that someone of this age will live long enough (pay enough in premiums) to make a profit. There’s no greed involved it’s simply reading the actuarial tables.

But again, even if you can get a whole life insurance policy when you are a senior citizen, the whole life policies rarely yield a reasonable rate of return unless held for at least 20 years. So, you better plan on living a healthy lifestyle if this is something you are going to do.

How much life insurance should I buy?

How much term life insurance should you buy? That’s a subject for another article, but a good rule of thumb is consumer advocate Clark Howard’s recommendation: buy 10 times your annual income. Remember, buying life insurance is not analogous to buying a lottery ticket; the intention should be to provide income for a loved one for a period of time until they can make it on their own.

How do I shop for life insurance?

Shopping for the best term life insurance rates is also a subject for another article, but start by using reputable insurance comparison websites is the best way to shop. Three good sites we recommend our AccuQuote.com, Insure.com or QuickQuote.com. Not only will they give you the rate, but some will provide ratings of the insurance companies themselves.

If you have an insurance broker already, get a quote from them. But, importantly, don’t rely on this existing relationship and sign the papers without first going online and comparing quotes.

And, as with any financial purchase, make sure that the company you are dealing with is rock solid. A quick search online will yield many consumer groups that can advise you.

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