Term Life Insurance vs. Whole Life Insurance

Term and whole life insurance, two of the oldest forms of life insurance, are still among the most common. Insurance providers have sought to make it more difficult to attract a wider spectrum of consumers. Shopping for life insurance may not be as entertaining as reading a spy novel, but they both have one thing in common: the further you delve, the more complicated it becomes.Read also: What is the Difference between Whole Life and Term Life Insurance?

So, to get back to basics, what is the difference between term and whole life insurance, and which is better for you? We’ll go over the main features that set these insurance staples apart.

IMPORTANT TAKEAWAYS

Term life insurance is “pure” insuranc, whereas whole life insurance has a cash value feature that you can access over your lifetime.

Term insurance only covers you for a set amount of years, while entire life insuranc protects you for the rest of your life—if you can keep up with the premium payments.

Whole life premiums may be five to fifteen times higher than term plans for the same death benefit, so they might not be a choice for those on a tight budget.

Life Insurance for the Short Term

Term life insurance is perhaps the simplest to understand since it is straightforward insurance with no frills. The only justification to purchase a term policy is the guarantee of a death payout for your beneficiary if you die while the policy is in place. As the name implies, this type of insurance is only valid for a set period of time, whether it is five years, twenty years, or thirty years. The policy then automatically expires.

 Advantages

Because of these two characteristics—simplicity and finite duration—term policies are also the least expensive, often by a wide margin. If what you want from a life insurance policy is the opportunity to cover your family in the event of your death, term is most likely the best option. Although no two families are alike, new parents can buy insurance that only lasts long enough for their children to finish college or enter the workforce full-time.

The typical 30-year-old male can get a 20-year term policy with a $500,000 death benefit for $28.73 per month, according to the online brokerage Policy genius. Because of her longer life expectancy, the average 30-year-old woman will buy the same policy for only $23.02.

Downsides

Of course, a number of factors can influence those costs. A higher death payout or a longer period of coverage, for example, would almost certainly raise the premiums. Furthermore, since most policies require a medical test, any health problems will increase your rates above the average as well.

Since term insurance expires, you may find that you have spent all that money for no reason other than peace of mind. Furthermore, you cannot use your term insurance investment to create wealth or save taxes.

Pros

Term insuranc is generally less expensive than other types of life insurance.

It is easier to comprehend than “permanent” policies.

Cons

Protection is only available during the policy’s duration.

It is not a wealth-building or tax-planning practise.

Life Insurance on the Whole

Whole life insurance is a form of permanent life insurance that varies from term insuranc in two important ways. For one thing, it never expires as long as you continue to pay your premiums. It also offers some “cash value” in addition to the death payout, which can be used to meet future expenses. 2

Advantages

The majority of whole life plans are “level premium,” which means you pay the same monthly rate for the life of the policy. These premiums are divided into two categories. One part of your premium goes toward the insurance portion, and the other part contributes to the growth of your cash value over time. Many providers offer a fixed interest rate (often 1% to 2% per year), but some businesses sell “participating” plans, which pay unguaranteed dividends that can boost the overall return.

Initially, the entire life premium is greater than the expense of the insurance itself. However, when you grow older, this changes and the expense becomes less than that of a standard term policy for someone your age. 3 This is referred to as “front-loading” the policy. 4 Later, you can borrow or withdraw from your cash value number, which rises tax-deferred, to pay for expenses such as your child’s college tuition or home repairs. In that regard, it is a much more adaptable financial instrument than a term regulation. Loans from your policy are tax-free, but any investment gains from withdrawals are subject to income tax.2

Downsides

Unfortunately, the death benefit and cash value are not entirely distinct functions. If you borrow money from your insurance and do not repay it, your death benefit will be reduced by the same amount. If you take out a $50,000 loan, for example, the beneficiaries will receive $50,000 minus any interest owed if the loan is still outstanding.

The biggest drawback of whole life insuranc is that it is much more costly than term insurance. Permanent policies are typically five to fifteen times more expensive than term policies for the same death benefit. For many customers, the extremely high cost makes it difficult to keep up with payments. According to a June 2016 study from the University of Pennsylvania’s Wharton School, approximately 25% of permanent life policies expire within the first three years. 5

Another disadvantage to whole life insuranc is its uncertainty. In a term policy, for example, you can actually avoid making payments if you no longer require or cannot afford the insurance. However, depending on the carrier, whole life policyholders can be subject to a surrender fee of up to 10% of the cash value if they want to cancel their policy. Typically, this charge decreases over time until it eventually disappears.

Prons

You can borrow against the entire life insurance policy to meet potential financial needs.

Loans, including death insuranc, are usually exempt from taxation.

You will fix your premiums for the rest of your life.

Cons

Whole life insuranc is far more expensive than equivalent term plans.

If you have to cancel the policy within the first few years, you will be charged a surrender fee.

Your death benefit will be reduced if you have any unpaid loans.Visit also: Finance Guide