Term vs Whole Life Insurance: Should You Invest the Difference?

Term life insurance covers you for a set number of years and is relatively cheap. Whole life covers you for life and builds a cash value, but costs much more for the same death benefit. A common alternative to whole life is to buy term and invest the difference.

A worked example

Suppose two hypothetical quotes for the same death benefit: a 30-year term policy at $40 a month and whole life at $450 a month. The term buyer invests the $410 a month difference ($4,920 a year). The whole life policy's illustration shows a cash value of $250,000 after 30 years. These figures are placeholders; real quotes vary widely by age, health and insurer.

After 30 years	Amount
Invested difference at 6% a year	$412,304
After 15% tax on investment gains	$372,599
Whole life cash value (from the illustration)	$250,000
Term + investing ahead by	$122,599

Compare your own quotes with the term vs whole life calculator.

The result depends heavily on returns

At a 4% return, the invested difference grows to $266,069 after tax, only about $16,000 ahead of the whole life cash value. Over a shorter 20-year comparison (whole life cash value $120,000), investing comes out about $62,000 ahead at 6%.

So the strategy usually wins on paper, but by how much depends on market returns you can't guarantee.

Questions to ask yourself

• Will you really invest the difference, every month, for decades? If the money would be spent instead, whole life's forced saving has real value.
• Do you need coverage for life? Term coverage ends. Some needs, like estate planning or a dependent who will always need support, last a lifetime.
• Which cash value are you using? Policy illustrations show a guaranteed value and higher projected values that depend on dividends. The guaranteed column is the cautious one.

Whole life policies also carry surrender charges if cancelled early. For larger decisions, consider a fee-only adviser who isn't paid commission on the policy.

Source: NAIC: Life insurance consumer guide.