Does Whole Life Insurance Ever Make Sense?

Whole life insurance may be the right choice in these circumstances only.

When buying life insurance, consumers have to choose between term life coverage and whole life coverage. Term life insurance is considerably cheaper and is the right choice for most people. However, that doesn't mean there is never a situation when buying whole life insurance coverage makes sense.

In fact, in one particular situation, whole life insurance may be a much better option. Here's what it is.

Many people won't need insurance for their whole life

Buying whole life insurance could be the right financial decision in situations where it is important to have coverage for the entirety of a person's life.

You see, the alternative, term life insurance, only pays out the death benefit if the policyholder passes away during a set period of time. If a consumer buys a 30-year term life insurance policy, the death benefit would be paid to their beneficiaries if they die during the 30 years after the coverage goes into effect. If they die 31 years after, no benefit would be paid.

For most people, term life insurance is sufficient because it's not necessary to have coverage forever. Eventually, the people who are depending on the deceased person would no longer require financial help or services. The policyholder's children would grow up and likely be able to support themselves, for example, so no further money would be needed to pay for their upbringing or education.

And most people don't earn income until they die. If a policyholder plans to have sufficient savings to retire and stop getting a paycheck after 30 years, then there'd be little need for continued insurance because their surviving widow or other dependent would be able to rely on their nest egg for income instead of needing a life insurance death benefit.

Some people need coverage for longer than a term provides

Sometimes, however, people actually do need coverage for life. This can happen in a limited number of situations; for example, if a person has a disabled child. The disabled child might never become financially independent and may need expensive healthcare and supportive care after a parent who is serving as a caregiver passes away. In this case, the parent may wish to purchase whole life insurance so a death benefit would be paid out to provide for the disabled child's care -- regardless of when the parent passes away.

It could also happen if someone wants a life insurance policy to pay estate or inheritance tax for heirs so other property doesn't have to be sold to cover these taxes. For example, if a family farm is valued very highly and is passed to heirs, it could trigger estate tax. The proceeds from a whole life insurance policy could be used to cover those taxes so heirs don't have to sell the land the farm sits on in order to cover the tax bill.

When lifetime coverage is needed, term life policies typically won't work since it may be impossible to get essential coverage at an affordable rate once the initial coverage term ends. As a result, it's important for each person to consider their unique financial situation -- as well as their ongoing need for insurance coverage -- when deciding if a whole or term life policy is best for their needs.