Term vs. Whole Life Insurance: How to Choose the Best Option


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UPDATED: 2021-04-02T20:45:01.958Z
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The two most popular forms of life insurance are term and whole life. There are many more life insurance alternatives that complicate the decision-making process, so focusing on these two is an excellent place to start.

So, what are the differences between term and whole life insurance? The first choice will last for a fixed number of years, while the second choice will endure for the rest of your life.

There is more to it than the length of coverage, however. As you decide on your budget, financial, and life goals, each alternative provides unique benefits and drawbacks. This article examines the definitions, the pros and cons of each choice, and how to choose the best life insurance policy for you.

What is Term Life Insurance?

Term life insurance provides you with coverage for a set time. It delivers protection to your beneficiaries if you die prematurely, which is why term life insurance also means “pure life insurance.” Your dependents will receive a payment if you pass away within your term life insurance policy.

When you buy the policy, you decide on the term. The most typical products come in 10, 20, and 30 years. The payout, also called the death benefit, will remain constant throughout the life of the term. In return, the policyholder will remit a regular premium payment for the set amount of time.

Term life insurance policies will expire after the agreed-upon number of years, which is advantageous for people who generate more wealth over time.

As you evaluate the different term life insurance policies, it is essential to think about the following:

  • Select a term that safeguards the years you pay bills.
  • Choose an amount that your family or beneficiaries would need if you could no longer care for them.

Term Life Insurance: Pros

Because of the finite number of years and simple structure, term policies will not be too expensive. If your only goal is to protect your family when you pass away, then term life insurance can provide you the necessary benefits. Here is a quick breakdown of term life insurance pros:

  • It is much easier to understand compared to whole or permanent policies
  • Term insurance is not as costly as other life insurance alternatives
  • There are no risks, exclusions, or hidden fees
  • You have the flexibility to discontinue the policy before it expires without sacrificing value

Term Life Insurance: Cons

There are a couple of variables that raise term life premiums, including longer coverage length or a greater death benefit. Below are some of the drawbacks to consider before going with term life insurance coverage:

  • You cannot leverage term life insurance as a tax-planning or wealth-building strategy
  • You only receive protection during the policy’s term
  • Since the coverage stops when the term ends, you will need to spend time searching for a new policy

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What is Whole Life Insurance?

Whole life insurance is a policy that delivers lifelong coverage. It also includes an investment and wealth-building component, also known as its cash value.

As the insurance policy matures, cash flow will build within a tax-deferred account. While the funds accumulate and grow, you will not need to pay taxes on these gains.

Whole life insurance also provides you two options: surrender your whole life insurance policy for cash or take out money against your account.

Although it is beneficial to have these borrowing options, your death benefit could increase if you do not pay back the policy loans with interest. If you choose to surrender your policy, your coverage immediately ends.

While whole life insurance is more complex than term life insurance, the underlying concepts are simple and straightforward. Here is a quick rundown:

  • Guaranteed death benefit
  • The premium stays consistent for as long as you are alive
  • The account’s cash value appreciates at a guaranteed growth rate

Whole Life Insurance: Pros

Whole life insurance combines investing and insurance into a plan that remains active your whole life. Here are a few other advantages with whole life insurance policies:

  • The insurance plan never expires, which means you can retain it for as long as you need
  • The cash value element is advantageous for estate planning activities
  • The insurance plan doubles as a saving and investing vehicle

Whole Life Insurance: Cons

The primary downside of whole life insurance plans is the cost. Compared to term life insurance, whole will usually run between 5-15 times more expensive. Below are some of the other disadvantages to consider with whole life insurance plans:

  • Other investment vehicles provide higher interest rates
  • The surrender value is inconsistent and may change throughout the life of the insurance policy
  • Users will buy less coverage than they need because of the higher costs
  • People will also surrender their policies too early because of the extra costs

Financial Comparison: Term vs. Whole Life Insurance

It is no secret that whole life insurance policies are usually 5-15 times more costly compared to a term life policy. When you use a term life policy, the premiums remain at an agreed-upon level for the entire duration.

Term life insurance policies are also cheaper because they are temporary and do not hold a cash value. Your beneficiaries typically will not receive a payout because you will remain alive at the end of the term.

There are a few term policy alternatives that will increase occasionally. Therefore, you need to understand the two types of term life insurance policies that will impact the cost: annual renewable and guaranteed level:

  • Renewable – you must renew these annual policies, and each renewal will boost the premiums. This policy is suitable for shorter coverage periods when the premiums start lower compared to guaranteed level premium options.
  • Guaranteed level – these are pure policies that guarantee the same premium for the entirety of the term.

As for whole life insurance policy premiums, they will remain constant regardless of how long you keep the policy. Because the whole life insurance covers an entire lifetime and provides a cash value, the cost will be higher. You will pay a higher premium because of the guaranteed investment rate return on the cash.

Which Insurance Should You Choose?

For most families who need life insurance, term life is a suitable option. It is almost always the more fiscally responsible option, but only if you commit to investing or paying down debt with the savins in premiums. However, whole life insurance and other alternatives with permanent coverage are good choices for many people also, particularly if you are the kind of person who would benefit from automatic saving.

When to Choose Term Life Insurance

Term life insurance is ideal if you wish to take some risk off the table for you and your family while spending the least amount of money to do so. When you are in the process of paying off your mortgage or raising children, owning a term life insurance policy is a good safety net.

When you wish to invest in more affordable coverage, term life insurance is the better choice. Because it does not carry a cash value and is temporary compared to whole life insurance, it will be 5-15 times less expensive.

There might be situations when you prefer permanent life insurance but cannot afford it currently. You can convert many term life insurance policies to permanent coverage. Depending on the policy, the conversion deadline will vary.

If you believe you can invest your money in better ways, it might be advantageous to go with the term life insurance policy. When you purchase a term life insurance policy, you can redirect the money you save. There are abundant strategies to grow your money so you can invest wisely.

When to Choose Whole Life Insurance

If you want to take care of a lifelong dependent, such as a disabled child, whole life insurance could be the better alternative. Life insurance can help build up funds for a trust, which provides meaningful care for your child once you pass away. Before you set up a trust, it would be best for you to set up a meeting with a financial advisor or attorney.

If you wish to use your retirement savings and leave behind funds for final expenditures like a funeral, whole life insurance policies are an excellent option. These funds can also go toward inheritance.

When you have multiple dependents, you might also want to compensate each one equally through inheritance. If you intend to leave a property or business to one of your children, a whole life insurance cash value could deliver equal funds to the others.

Whole life insurance policies will also enable you to provide funds for your heirs and pay estate or inheritance taxes. Depending on your state, estate and inheritance taxes will vary.

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Frequently Asked Questions

If you are still unsure about life insurance and the difference between term and whole, please see below for some frequently asked questions.

What are the differences between whole life and term life insurance?

Term life insurance offers a budget-friendly coverage option with no hidden fees or extra contingencies. These premiums are less expensive than all other policy types. Whole life insurance is costlier because it expands over your entire life and includes a wealth-building element.

How much would I pay for life insurance?

Your overall life insurance cost will depend on health, gender, age, and lifestyle choices. On average, here is what you can expect to pay per month:

  • 20 years old: $17.02 per month for a $250,000 term life insurance policy; $66 per month for a $100,000 whole life insurance policy
  • 30 years old: $16.94 per month for a $250,000 term life insurance policy; $89 per month for a $100,000 whole life insurance policy
  • 40 years old: $22.95 per month for a $250,000 term life insurance policy; $136 per month for a $100,000 whole life insurance policy
  • 50 years old: $50.62 per month for a $250,000 term life insurance policy; $217 per month for a $100,000 whole life insurance policy

Can I convert policies?

When your term life policy is about to expire, you might want or need coverage. You can convert the term policy into a whole life policy once it ends. If you decide you no longer require the coverage, you can allow your policy to expire.

Is whole life or term life better?

The better option depends on your current situation and long-term goals. Term life insurance is a more popular alternative because it is much more affordable. Whole life insurance is an excellent option for those with dependents or higher net worth.

How long will life insurance last?

Depending on which type of coverage you choose, life insurance can last for a set period, or your whole life. Term life insurance will ensure anywhere between 10-30 years, while whole life insurance will last your entire life.

What is a beneficiary?

A beneficiary is an entity or person that serves as a recipient of the policy’s death benefit. The beneficiary could be a person not related to you, a family member, or another organization or business.

The policyholder chooses the beneficiary, and you do not need permission from the beneficiary or insurance company. You also have the right to select multiple beneficiaries. You can then allocate the death benefit to each.

If you die during the policy, the insurer will automatically distribute the death benefit. It would be best for you to notify the beneficiary in advance, so they can take necessary action if issues arise.

What are other life insurance types?

Universal life (UL) insurance is a form of life insurance with the following conditions and benefits:

  • The insurer determines a variable interest rate, which the cash value part will earn
  • You can change the benefit amount or premium
  • You can utilize the cash value element to reduce or pay your premiums

Variable universal (VUL) life insurance is a kind of permanent life insurance that promises the following:

  • You can adjust the benefit amount or premium, much like UL insurance
  • You can reinvest the policy’s cash value component into the insurance company’s various investments
  • Unfortunately, your cash value could decrease over time since you invest it

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