When I did my series of articles on life insurance, the piece of advice that I stressed was that most people should consider term insurance over all of the other varieties. The main reasons were that term insurance was the simplest to understand, and it fits the needs of most people. Many people counter this advice with an argument that goes along the following lines:
If you buy term life insurance and you end up not needing it, you end up with nothing. On the other hand, if you buy whole life/universal life/variable universal life and you don't need it, you still end up with some cash value. Therefore, your premiums aren't totally wasted.
To those people I respond with the following: repeat after me....
(wait for it)
That may seem self-evident, but some people don't seem to get it. You don't buy insurance as an investment. You buy it in order to protect yourself financially from some unlikely but catastrophic event. In the case of life insurance, that catastrophic event is your premature death. If you die early, you want to leave your beneficiaries the means to carry on without out. You want to make sure that your spouse is able to pay the mortgage or your kids are able to go to college if you leave this Earth before your time. The premium that you are paying isn't supposed to accumulate wealth for your retirement; it is supposed to give you the peace of mind that your family will be provided for when you are gone.
The other fact that many neglect to mention is that you are paying extra for the cash value accumulation that occurs when you buy whole life. Part of the premium goes towards paying for the insurance and part goes into your cash value fund. If you pay a premium of $100, $20 might go towards insurance and only $80 of the $100 might go towards cash value (these numbers will vary by policy but you get the idea). In essence, you are buying insurance AND an investment at the same time.
You can accomplish the same thing by taking $100, using $20 for term insurance on your own and then investing the leftover $80 on your own. In fact, you might come out ahead since you might be able to invest in a lower cost fund than what the insurance company would charge you.
If you still aren't convinced, think about car insurance. Why do you buy car insurance? You don't buy it as an investment. You buy it because you probably couldn't afford to pay tens of thousands of dollars to settle a claim for an accident that you caused. You pay a little bit each month to the insurance company (which you can afford) to protect yourself from the catastrophic event (which you cannot afford). If you don't get into any accidents, then you don't get anything back. However, who can guarantee that they won't get into any accidents?
The bottom line is that you don't purchase insurance to make money. You buy it to protect yourself from losing money if some terrible, rare event happens. Whole life insurance is a anomaly because it isn't really insurance. It is insurance plus investment. That's the only reason why you end up with money if you don't need it.