How do I determine if Term or Whole Life Insurance is best for me?

First, you need to find out your need. Do you need this for the rest of your life because you believe you will be broke forever or just temporary because you don't have much saved right now, but can start saving for the future?

Second, you need to understand the products.

Whole life insurance is a type of plan that is a level term to age 100 plus a savings plan attached to it. Because of the savings plan, whole life insurance is very expensive. Your cash value grows tax-deferred at a 1-3% APY and you can borrow it anytime. Just like any loan, you will owe monthly interest on it at a rate of 6-8%/year. If you borrow, your death benefit will be reduced by whatever amount you borrow until you pay it back. When you die, your beneficiary will only get the death benefit, but all the cash value will be kept by the insurance company.

Term insurance contains no savings plan, therefore it gives you flexible options on where you want to save your money. It is inexpensive and is there to fill a void until you do build enough wealth that you don't need life insurance anymore. Premiums remain level up to a certain point, which depends on what type of level term insurance you get. Is it 10 year, 20 year, 25, year or 30 year term? When the level term expires, your premiums will go up. You may cancel the policy, convert it to a whole life policy, exchange it for another term policy, or renew it.

I have always sold term insurance and help clients invest their money 100% of the time. That way they can rent wealth (term insurance) while building wealth (investing). What if the client does die during the term? The family will get the death benefit plus all the investments versus if this was whole life, you only get one of the above. If client does live through the term, in 20-30 years, their investment profile has grown, they have less financial obligations, so the need for life insurance declines. Depending on how much they saved, they probably don't need life insurance or need as much coverage.

Lets say you are 30 years old and you bought a $100,000 Whole Life policy and pay about $100/month ($1200/year), hypothetically? I don't know how much of it goes toward insurance and how much it goes toward the cash value, but lets hypothetically say that $55/month goes into cash value, $20 goes toward insurance, and the rest goes toward fees. The insurance company gives you an interest rate of 2% on it. In 30 years, this will grow to $27,145. By this time, you paid a total of $36,000 in premiums. So you have a loss of almost $9000.

What if you had a 30 year term policy of $100,000 and paid $20/month ($240/year) toward it and you put $55/month into an IRA and the mutual fund had an average rate of return of 10% over a 30 year period? In 30 years, you can potentially have $125,363. Its not guaranteed you will get 10%, but even at 8% is better than what you get in a life insurance policy because life insurance policies have lots of fees that eats away the returns on the savings.

If you invested the difference of $80/month at a 10% rate of return, in 30 years you can potentially have $182,346.

If you built this amount of wealth, do you think you will still need life insurance in 30 years? Maybe, maybe not. I don't know what your needs going to be in 30 years, but until then, all you have to focus is what you need now and worry about that later.