Should I purchase term life insurance or whole life Insurance?

My wife and I are in the process of closing on a home purchase, and want to be insured in case something happens when we start paying on our mortgage. We are both healthy, 28-year-olds with no children. My father-in-law think we should purchase a whole life policy with a mortgage rider because of the cash value accumulation. But I am leaning towards two 30-year-term policies with $500,000 to $1 million coverage for both of us. Our mortgage is going to be roughly $180,000. The term insurance is a lot cheaper. Is the extra money that we'd be putting away towards the cash value in a permanent policy be better invested in either our Roth IRA, 401(k), and 529 plans, or kept as cash flow?

Co-Published on Investopedia

Co-Published on Investopedia

Based on the information you provided, it appears a term policy is most likely the right policy for you. The extra money would probably be better used to build an emergency fund and then invest for your retirements. There are two broad categories of life insurance; temporary and permanent. Term insurance is temporary insurance and whole life would be one of the permanent insurance options. Choosing between them comes down to a simple question: do you have a temporary or permanent life insurance need?

Because you are worried about a mortgage, which will end in 30 years, then a term policy is the correct choice. There are permanent life insurance needs, but nothing you've mentioned falls into this category. The cash value of the whole life insurance policy is wonderful for the purpose of paying for a permanent insurance need, but it's generally crap for long-term investing when compared to other investment vehicles.

The size of the policies are healthy, and likely sufficient to provide for your overall needs (this is a guess, and to know for sure, I'd have to look at a complete needs analysis for you.) If you are still unsure of the amount and type to buy, I recommend having a fee-only financial planner do a life insurance analysis for you two before you buy. A fee-only adviser is paid directly by you for the advice and does not get paid based on the amount of insurance they recommend. 

A life insurance agent, on the other hand, is a commissioned representative and therefore is paid more if they recommend you buy a larger policy. The conflict of interest here is obvious.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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