Life insurance for a young family has one job: if a parent dies, the other parent should not also have to sell the house, quit work or take on debt to keep the children's lives intact. Once you see the job clearly, the choice between term and whole life mostly makes itself. But the two products are sold in ways that hide the job, so it is worth spelling out what each one actually is.
Term life
Term insurance covers you for a fixed period, typically 10, 20 or 30 years, and pays out only if you die during that period. When the term ends, the coverage ends, and you have paid for a safety net you did not use. That is the point. It is the same as home insurance: you hope to waste the money.
It is cheap because most people outlive the term. For a healthy 32-year-old non-smoker, $500,000 of 20-year term coverage runs somewhere around $25 to $35 a month. Two parents can be covered for less than a phone plan.
Whole life
Whole life covers you for your entire life, as long as premiums are paid, and it builds a cash value you can borrow against or withdraw. The premium is fixed and much higher: for the same $500,000, often eight to twelve times the term premium. Part of that premium goes to the insurance and part goes into the cash value, which grows slowly, especially in the early years, because commissions and fees come out first.
It is sold as insurance and savings in one product. It is more accurate to call it a savings product with an insurance policy attached, priced so that the salesperson is paid very well in year one.
The comparison that matters
Take the difference between the two premiums and invest it yourself, in an ordinary index fund inside a retirement account. Over twenty years, at historical returns, the invested difference usually ends up larger than the whole life cash value, and it is your money without borrowing against a policy to reach it. This is the "buy term and invest the difference" argument, and for most young families the numbers support it.
How much coverage
A common rule is ten times the insured parent's income, but it is better to work from the job. Add up: the mortgage balance, the cost of raising the children to independence, a few years of income replacement so the surviving parent can adjust, and any debts. Subtract existing savings. For many families that lands between $500,000 and $1,000,000 per parent, and the stay-at-home parent needs coverage too, because replacing what they do costs money.
Choose a term that lasts until the youngest child is through college. For a family with a newborn, that is a 25- or 30-year term.
When whole life makes sense
There are real uses: estate planning for people with assets above the federal estate tax exemption, funding a special-needs trust, or a business buy-sell agreement. If none of those describes your household, and it does not describe most, the case for whole life is weak.
What we did
Two 25-year term policies, $600,000 each, bought through an independent broker who quoted several companies. The medical exam was a nurse visiting the house for twenty minutes. The combined premium is $61 a month, and the difference between that and the whole life quotes we were shown goes into retirement accounts every month, where we can see it.
