Deciding between term and whole of life (WOL) insurance could be the most vital financial decision you have to make as it could do more harm to your financial plans than any other existing financial product. When looking at life insurance, how do you know if you need term, WOL, or a combination of both?

The main financial benefit of a term life policy is that your family receives the money upon your death. If you live, they will receive no benefits.

On the other hand, WOL policies offer death benefits and a "savings account" so that if you live, you usually get at least some of it (mainly more than what you spent on your premiums).

Since the money from the WOL insurance premiums is deposited into a savings program (preferably long-term), it would add up to a higher cash value since more money has been paid in and the cash value has earned.

It is all about cash value. If you buy a policy today, that first annual premium is usually much higher for a WOL policy than for term.

However, the premiums for WOL usually stay the same over the years, while the premium for term life increases. That extra premium paid in the initial years of the permanent policy gets invested and grows. The good news is that the increase is tax-free if the policy is cashed in during your life. (If you die, the proceeds are usually tax-free to your beneficiary.)

The first years are the most important. By keeping your WOL policy long term you will have the best deal. But how long is long enough? Well it depends on your age, health, insurance company, the types of policies chosen, interest and dividend rates, and more.

Tips for your decision. It all comes down to how long you want to keep the policy. If it is less than 10 years then the best preference is term. If it is more than 20 years, WOL may be the best way to go.

How to choose. Life insurance should never be purchased as an investment; it is protection for your family. After all, some of the premiums are being used to buy the death benefits and to cover other expenses.

Term insurance. Term insurance is relatively simple. You can buy term insurance that stops after 10 or 20 years, or that can be continued until age 70 or later. You can choose for your premium to increase each year (annual renewal term) or to be the same amount for a fixed number of years.

With some policies, the company reserves its right to increase premiums if its costs increase. With others, the issue is your health.

3 types of Whole Life Insurance

• Traditional whole life insurance. The benefits can be paid out immediately to the nominated beneficiaries without any tax liability or deductions.
• Universal life. More flexible than traditional whole life because the premiums can vary from year to year and sometimes can even be skipped.
• Variable life. Variable life insurance has the fewest guarantees and therefore offers the greatest potential for cash value increases.