Life Insurance: Term, Whole Life and How Much You Need

Term life versus whole life

Term insurance covers a fixed period — commonly 10, 20 or 30 years — at a level premium, and pays only if you die during the term. Whole life and other permanent policies never expire, build cash value, and cost several times more for the same death benefit because part of every premium funds that cash value and the insurer's guarantees.

Permanent cover earns its place in narrow cases: a lifelong dependant with special needs, estate liquidity for an illiquid business or farm, or a maxed-out saver deliberately using the tax treatment. For everyone else, buying term and investing the difference produces more protection and more money.

How much life insurance do you need?

Add your outstanding mortgage and other debts, the cost of raising and educating dependants to independence, and the income your household would need to replace for the years the survivors depend on it. Subtract existing savings and any group cover through work, which usually disappears when you leave the job.

A common shortcut is ten to twelve times gross income, which is a reasonable starting point but ignores the two variables that matter most: how many years of dependency remain, and how much of the mortgage is left. Run the numbers rather than taking the multiple.

What underwriting looks at

Age and health drive the price. Insurers review a paramedical exam or accelerated underwriting data, prescription history, motor vehicle records and the MIB database, and they rate for tobacco use, body mass index, blood pressure, cholesterol, family history of early cardiac or cancer diagnoses, and risky occupations or hobbies.

The same applicant can be quoted very different prices because each carrier has its own niche — one prices diabetics well, another treats well-controlled high blood pressure gently. That is why an independent broker who shops multiple carriers usually beats a single-company quote for anyone who is not in perfect health.

Riders worth paying for

A handful of riders genuinely improve a term policy. Others exist mainly to raise the premium.

• Waiver of premium — keeps the policy in force if you become disabled.
• Conversion — lets you switch to permanent cover without new underwriting, valuable if your health changes.
• Accelerated death benefit — pays part of the benefit early on a terminal diagnosis; usually included free.
• Child rider — cheap, but life insurance on a child is protection you rarely need.

Buying it correctly

Match the term to the dependency period: a 30-year term for a young family with a new mortgage, a 15-year term for someone a decade from retirement. Laddering two policies — a larger short term plus a smaller long one — mirrors falling need and costs less than a single large policy.

Name beneficiaries explicitly and review them after any marriage, divorce or birth; the beneficiary designation overrides your will. Death benefits are generally received income-tax free by the beneficiary, though large estates can face estate tax, which is where trust ownership becomes relevant.