Term Life Insurance is pure insurance in the sense that the person purchasing it is just paying for insurance and a commission. There is no savings plan associated with term insurance as there is with Whole Life Insurance.

The main purpose of any type of insurance is to protect against the possibility of a financial loss. Thus, people purchase collision insurance on their car so that in the event the car is damaged or destroyed in an accident the owner will receive money from the insurance company to cover the cost of repairing or replacing the car. Automobile owners also purchase (in most states they are required to purchase) liability insurance so that in the event they are responsible for damaging someone else's property in a accident involving their car they will receive money from the insurance company to pay for the damage rather than having to come up with, potentially thousands of dollars, from their personal resources to pay for the damage.

Life insurance does not really insure against the loss of a person's life as there is no way to replace a lost life. What life insurance does insure against is the loss of a person's income due to death. And the beneficiary of this loss is not the deceased, who no longer has a need for income, but the person or persons who are dependent upon the income and financial support the deceased previously provided.

The real value of life insurance can be seen when we look back at the typical family of fifty or one hundred years ago where the husband worked and provided income and the wife stayed home and raised the children. The wife and children in this case were dependent upon the husband's income and life insurance provided funds necessary to allow the wife and children to maintain their life style in the event of the husband's early death.

Even though the wife in the above example was not bringing in an income, a life insurance policy on her life also made sense because of the services she provided in caring for the children and managing the home. While she didn't produce a cash income, the loss of her non-cash services would require that her surviving husband would have to either not work as much, thereby losing income, in order to spend more time caring for the children or hiring and paying someone to care for the children. In either case, the income that remained after either taking a cut in pay due to reduced work hours, or hiring outside help would be considerably less than before the death of the wife thereby leaving the surviving family worse off financially following the death of the wife.

Today where in many households both husband's and wives work, life insurance on both is still necessary since the family usually needs both incomes to maintain its lifestyle. Even in cases where there are no children, life insurance on both may be necessary as the loss of one spouse's income could mean the loss of a dream home or other luxuries that the couple could only afford with both incomes.

Today we also have many single parent households and life insurance is critical here to ensure that the children are cared for in the event of the death of the parent. It costs money to raise children and leaving money behind to raise them makes it easier for relatives or friends take the children in and raise them. In both single parent and dual parent homes life insurance can also guaranty that children can still go to college as planned or take advantage of other things that parents dreamed of providing for their children.

Life insurance can also provide a safe financial future for a relative or friend who is financially dependent upon the insured. Other uses of life insurance can include:

- Individuals will sometimes buy life insurance to pay off a loan in the event of their death thereby saving burdening their heirs with the loan. Mortgage lenders often offer this type of life insurance to customers buying a new home.

- A wealthy person who is a major supporter of a charity may have a life insurance policy with the charity as the beneficiary so that upon the death of the wealthy donor the charity will not have an immediate drop in funds but will have the insurance funds to carry them over while they seek other donors to replace the deceased.

- Business partners use life insurance on each other to fund a business continuity plan to keep the business going in the event of the death of one of the partners. In this case the insurance covers the value of each partner's share of the business so that in the event of the death of a partner that partner's survivors can be paid off in cash rather than either being brought into the business to replace the partner or their forcing the business to liquidate in order to cash out the deceased's investment.

- Larger businesses also take out insurance policies on key personnel who are critical to the company's financial success. A sales rep who brings in a large portion of business each year, a technical person whose expertise generates significant income annually, etc. In these cases the life insurance provides funds to replace the lost income and allow the company time to find a replacement for the deceased. Movie studios will often take out a life insurance policy on a star whose death before the completion of a movie could cause it to fail and the studio lose their entire investment.

All life insurance is based upon the probability of the insureds death. The greater the chance of death the greater the cost of obtaining insurance. While no one can predict when a specific individual will die, an actuary (who is a person who spends their life calculating the probabilities of others dieing) can come up with a fairly accurate estimate of how many people in a group of 1,000 people with similar characteristics and circumstances will die within the year. While the actuary cannot identify which of the 1,000 will die, they can, with a high degree of accuracy, predict how many will die.

With this information, life insurance companies price policies so that the total premiums collected from each of the 1,000 people will be sufficient to pay off those who die with enough left over to cover the costs of providing the insurance, building a reserve to cover unusual situations where more people than expected die, and hopefully, some profit as well. Obviously, the older a person is the greater their chances of dying which means that the cost of a life insurance policy will go up each year.

In addition to the cost of the insurance increasing each year, insurance companies will refuse to sell insurance to people who have an extremely high probability of dying during the term of the insurance. People diagnosed with a terminal illness (hence the frequent requirement that an applicant have a physical exam before being accepted for a policy) as well as people whose jobs or life styles are such that they are likely to die soon.

Regular term insurance policies are usually written for one year. If a person needs the insurance for more than one year they not only face the prospect of having their rate go up with each renewal but also face the risk of a change in health or other circumstances that render them un-insurable when it comes time to renew.

Insurance companies have come up with two main alternatives to simple term insurance which gets around both of these problems.

The first is what is usually called Level Term Insurance which is a multi-year policy that can usually be purchased for anywhere from 5 to 30 years. They are not only insured for the entire period they choose but are also given a fixed annual premium that does not increase during the term of the insurance. Of course, this premium is calculated by adding up the premiums for each year of the period covered (and each year the premium rises) and dividing by the number years of the policy making the fixed policy amount the average of the cost of each year's premium amount.

Thus, in the early years of the policy the insured pays more than if he or she had just taken a single year policy, while in the later years the cost is less than they would be paying for a single year policy. Overall, the total cost of the policy for the full term is about the same as would be paid if renewed each year at that year's higher rate.

The other thing that is attractive here is that they have the coverage for the full term regardless of what happens to their health or other changes in their lives (of course, the policy will list certain types of activities - such as joining the military and serving in combat - for which the insurance will not pay in the event of death due to that activity).

The second type of policy is called Whole Life and this is insurance that, unless cancelled, lasts until the person dies and the policy is paid. Not only is the person guaranteed to have the insurance until they die but the premium is fixed for the entire term of the policy.

Whole Life Insurance is really a combination term insurance policy and a savings account. The idea behind whole life, in addition to the benefit of a fixed premium and guaranteed insurance for life, is that a person figures that they need to leave behind upon their death X Thousand Dollars to take care of their loved ones. However, they don't have that amount of money available to set aside for their loved ones at death - if they did they could simply put it in the bank where it would sit until they died and it was given to their family.

With whole life insurance a person essentially buys a life insurance policy that will pay the X Thousand Dollars they have determined their family will need on their death and, at the same time, pays an additional amount (which is calculated and included in their annual life insurance premium) to be invested for them by the insurance company. This investment portion of the life insurance account is known as the cash value of the policy. Each year the cash value increases due to both the addition of part of the premium payments and the earnings from the investments made with it. Also, each year, the insurance company reduces the amount of insurance coverage the insured is paying for by the amount of the cash value thereby reducing the cost of the insurance to the insured. This reduction is offset by the increase in the cost of the insurance due to the fact that the insured is now a year older.

This use of a dual savings and insurance product allows the company to keep the premium fixed for the customer while combining the increasing cash value with the decreasing insurance coverage to maintain the X Thousand Dollar death benefit the customer purchased. Thus, over the course of 30 - 40 years or so the customer will end up accumulating the X Thousand Dollars for their loved ones and will have no more need for the insurance that provided the difference between the cash accumulated in the cash value and the X Thousand Dollar desired payout. Of course, if the insured had died any time between the signing of the contract on day one of the policy and the day on which the cash value reached the desired death benefit, the insurance portion of the policy would have guaranteed that the insured's family received the full death benefit.

In closing, the question in most people's minds is which is better term or whole life?

The savings aspect of whole life appeals to many people and may be good for people who lack the discipline to save regularly.  Whole life does allow a person to accumulate a substantial sum over a long period of time.  If the holder of the policy decides it is no longer needed, it can be cancelled and the holder will receive a check for the cash value.  Similarly, in an emergency, the holder can borrow from the cash value without canceling the policy (however, if the insured dies and there is a loan against the cash value the balance of the loan will be deducted from the death benefit paid to the beneficiary).  Finally,  once the policy has been paid in full and the cash value is equal to the death benefit the holder has the option of letting it sit and be paid to the beneficiary when he/she dies; convert it to an annuity and receive and income for life; or, cash it out and do what he/she wants with the proceeds from the cash value.

The problem with whole life is that it is considerably more expensive than term insurance, the investment return on the cash value is generally not very large and the insurance coverage doesn't change as the individual's need for insurance changes.  Further, because of the long life of the policy and low return on the cash value, inflation will tend to erode the buying power of the cash value so that once the policy is fully paid the purchasing power of the money in the cash value is considerably less than what the holder anticipated forty or more years before when the policy was purchased with the intention of it being both an insurance and savings plan.  (NOTE:  despite its drawbacks, whole life can be an excellent vehicle, due to tax laws, for saving for a child's education as explained in my Hub Funding a College Education with Life Insurance)

Term insurance, on the other hand can be a very flexible tool for protecting against loss of income as a result of the death of an income earner.  With no provision for building a cash value, the cost of term life is considerably less than a comparable whole life policy which means a person either pays considerably less than whole life for equivalent coverage or is able to purchase considerably more insurance for the same price. 

A potentially bigger source of savings with term insurance is the fact that it can be purchased only when needed and only for as long as needed.  Thus, when a family has small children who are more dependent upon their parents for care, policies can be purchased for both parents to maintain the family's standard of living in the event of death of one of the parents.  As the children get older and require less care the insurance can be reduced or dropped entirely.  If the concern is ensuring that money is available for college for the children a policy can be taken out for an amount and term needed to accomplish that (although a whole life policy on the child for this purpose might be a better deal).  If a couple purchases an expensive home that requires both incomes or one that a non-working spouse couldn't afford if the working spouse dies a term insurance policy can be taken out to cover the mortgage (purchasing a regular term policy rather than one sold by the lender to cover the mortgage would be better as it would not only be less expensive but would give the surviving spouse options other than simply paying off the mortgage). 

While individual needs and capabilities differ, in general term insurance is usually a better deal than whole life for most people and their situations.