Hi, your friendly insurance guy here again. :)
Long, but hopefully informative, post.
Let's get the ugly bit out of the way first:
Term is cheap, Whole Life is expensive. Whole Life pays an agent or broker more commission because it costs more and generally is given a higher percentage commission than Term products. I mention this because there are a lot of people who hate Whole Life products and think the people who offer them are sleazy. Thus, I am putting that bit out here right in front to satisfy the Whole Life Haters. :)
Here's how Term Works:
You buy it for a specified period of time (typically 1, 5,10,15,20,25 or 30 years). When that period, or TERM, is over, you can usually renew it yearly at a vastly increased cost until you reach a particular age. The age at which you can no longer renew vaires by insurance company. If you live past your TERM and have not renewed, your family gets nothing and you have lost all the premium money you spent (unless you have a "Return of Premium" rider, which not all companies offer and which is often extremely expensive to add).
Here's how Whole Life works:
You buy it now. It stays in force typically as long as you pay your premiums. The payments stay the same forever; ther eis no "holy crap the renewal cost is insanely higher than last year." It develops a cash value over time and in many cases the face value of the insurance goes up as well.
This, by the way, is the fallacy of all those people who say "the insurance company keeps the cash value when you die." That's not exactly accurate. As long as the cash value is in the policy, the typical function of it is to pay for additional face value of the insurance. So yes, while you don't get a check for the cash value when you die, your death benefit will be larger than the original face value of the policy, making it generally a wash. If you have had the policy for a very long time, the policy owner comes out ahead in many cases.
The cash value is NOT, NOT, NOT an "investment." That term is reserved for certain other things, like mutual funds. It can be called a cash accumulation vehicle or a savings vehicle. It is NOT an "investment."
The downside to Whole Life is that it costs a LOT more than the same face value of Term insurance - at least, in the short run. If you buy a 20-year term policy for $100,000 at age 25, start renewing it annually after it runs out at age 45, and compare your lifetime costs, the Term policy will absolutely kill your wallet. The Whole Life policy in the long run costs a LOT less than constantly renewing an old Term policy. This does NOT mean Whole Life is for everyone. It's only appropriate in some situations and for certain clients with specific needs.
So which one is the best? This is the part where I hope folks who are shrieking "But...but Suze Orman told me to buy term and invest the rest" realize I am not some commission seeking scumbag:
IT DEPENDS. There is no "off the cuff" answer. To know for sure which is the best for you, your specific situation needs to be evaluated. Contrary to what other folks may say, I do recommend using an agent. I do that because I am one and I treat clients properly. If you go to an insurance company directly, you lose the benefit of having a local contact. And guess what? Generally life insurance companies are NOT going to give you a discount because there's no agent involved. They charge the same and keep the commission money themselves.
So talk to an agent. Talk to several. Find one that you are comfortable with. The agent should be focused on doing a full evaluation of your specific needs. Be careful with anyone who says:
"Buy Term and Invest the Rest." (they have a preconception of what's right without wanting to consider your case may not fit their mold - ask if they are willing to consider other viewpoints based on your particular situation)
"Get 10 times your salary" (anyone choosing the amount based on a formula is giving you a canned answer, not one tailored to your particular needs. Ask if they can help you arrive at a number tailored to your family's needs rather than using a formula)
and run from anyone who does not try to do a full evaluation.
Look for someone who will help you BUY insurance, rather than try to SELL you on something.
And I know this is a scary one, but once you have done the evaluation, ask if that company does temporary binders/receipts. If they do, it means you can get coverage in force while the application process is under way. If it's available, DO IT. Fill out the application. Once you have your evaluation and know what the right amount is, do the application as entirely TERM insurance, even if you are getting other types. Have hte agent include a cover letter and notes in the application to process you for approval but NOT to issue the policy till the underwriters speak with him or her. This will keep the expected first month's premium low. Write the check for the first month and give it to the agent. Why do that?
BECAUSE YOU ARE NOW COVERED, and once you are approved, you can always have the agent call the underwriter and say, "Hey, remember Mary Jones who got approved for $750,000 of 20-year term? Well, she wants it issued as $500,000 of the term and $250,000 of Whole Life."
You are allowed to decline to accept the policy and get a refund any time during the application process, during underwriting, and past the time you accept delivery up till the end of what is called the FREE LOOK period. IN my home state, that is ten days long.
So in reality, you are not committed to anything till ten days AFTER you've been approved and had the policy delivered.
Once you get approved you can change what KINDS of insurance you'll receive.
What you don't want to happen is that you die after having taken the trouble to go through the process, but NOT bound the policy. Can you imagine how badly it would suck if you actually did all this but did not pay the first premium so you could bind the policy and then died on your way home from the application appointment?
Remember, you can get your money refunded to you any time up till the end of the Free Look period. Why not get the coverage in force from the day you do the application?