Term life insurance replaces the income of the primary earner if they die during the working years. It is cheap, straightforward, and the correct choice for nearly every household that needs life insurance. Whole life is a different product — an investment wrapper — and is almost never the right choice for a household that has not already exhausted other tax-advantaged accounts.
- 01Compute the correct death benefit for a household.
- 02Choose a term length that matches the period of dependency.
- 03Explain why whole life is almost never right for the household that needs term life.
How much
A common rule is 10–12 times annual income. A more precise number is the sum of debts to be paid off, education costs for dependents, and the present value of the income the household needs to replace over the remaining years of dependency. Round up.
How long
Match the term to the period of dependency. For a household with young children, 20 or 30 years. For a household nearing an empty nest, 15. When the dependency ends, so does the need — do not pay premiums into old age unless a specific estate-planning purpose demands it.
Term versus whole
Term is pure insurance: premium in, death benefit out, nothing else. Whole life bundles insurance with an investment account inside the policy, with fees that make it a poor investment vehicle. Households that have maxed every tax-advantaged account and specifically need an estate-planning tool sometimes buy whole life. Everyone else buys term.
- Term matches the years of dependency.
- Death benefit sized to replace income and clear debts.
- Whole life is almost never the right product.