What is the Difference Between Term and Whole Life Insurance?

Are you thinking about buying life insurance, but don’t know where to start? Here’s a money saving tip: get it while you’re still young(er) and healthy!

Now, let’s look at the main two insurance options: term life and whole life insurance. We are going to examine pros and cons and the difference between term and whole life insurance policies. (Then, I’ll tell you what I chose for my family!)

the Difference Between Term and Whole Life Insurance feature image


What Is Life Insurance and How Does It Work?

Life insurance provides financial protection by protecting your lost income if you were to unexpectedly die. You create a contract with an insurance carrier that is paid by a yearly or monthly premium. Premiums are based on the type of insurance you are obtaining and the statistical risks posed to the carrier (your age, career, medical conditions, etc).

It is particularly important to have a life insurance policy when you have family members that depend on your income. This is because the death benefit (which is the total amount paid out by your life insurance company) can replace your income, pay for funeral costs and cover any debts that you may have by awarding these funds to your chosen beneficiary.

A beneficiary is the individual or individuals that you choose to receive the death benefit, such as a spouse or children. However, you can also designate this amount to anyone you’d like (including pets or charities). 

Term Life Insurance

Term life insurance serves the sole purpose of providing a death benefit to your chosen beneficiaries if you were to pass away in a given period of time. The term length of the policy can range from 10 to 30 years, but are often customizable if you need a different length of coverage time. As long as you continue to pay the premiums determined by the insurance carrier, you will be covered until the term expires. 

To secure a term life insurance policy, you will first want to research the best life insurance companies for your particular needs. After researching companies and getting quotes (which are mostly based on your age and health), you will need to fill out an official application with the carrier you choose.

This application will ask for proof of income, a release of health records from your doctor and a series of general questions in your application about your age, income, marital status, health conditions and hobbies. Once you fill out the application, you will have a phone interview and set up a medical exam. 

The medical exam is an in-depth look at your health and the risks that you pose to the insurance carrier. You will need to take a blood and urine sample, as well answer a series of health questions to help the underwriters determine a premium amount for your policy.

Once underwriters look through your application and you are approved (which can take about three to six weeks), your coverage begins. 

Because term life insurance expires after a certain amount of time, the policies are much less expensive compared to whole life insurance, making this an important factor in determining whether or not to purchase a term vs. whole life insurance policy.

This is especially true if you are securing coverage when you are younger and in overall better health.

Once you lock in a rate, the amount you pay each month will not change, even if you were to develop a health condition that would normally result in a denial of coverage.

If you were to pass away during the term you selected, your designated beneficiaries would receive the death benefit payout. 

Term Life Insurance Pros and Cons

Positives

  • Term life insurance policies usually come with a much more affordable price tag, making this a good option if you are only looking for coverage for a certain amount of time. 
  • The process to obtain term life insurance is fairly straightforward.
  • Your rate won’t go up after you obtain a policy due to an unexpected health issue, so securing a policy when you are younger and healthier is recommended to obtain the best rate possible.
  • Because there are so many different companies that offer term life insurance and these companies all have diverse requirements, finding coverage despite having certain health ailments is still possible.

Negatives

  • Term life insurance expires, so once your coverage time ends, your policy ends as well. This means that you would then need to re-apply for a new policy (which may be harder and more expensive at that time) if you still needed coverage.
  • It can be difficult to be approved for coverage if you have certain medical conditions. Alternatively, you might end up paying a much higher rate because of these ailments.
  • Even though you are paying for coverage each month, your policy does not build cash value.

Is Term Life Insurance Worth It?

Term life insurance is a great way to ensure that your family is financially secure, even in unplanned circumstances. In most cases, term life insurance policies can be obtained at an affordable monthly rate, making this a beneficial safeguard to have.

Life is unpredictable, and if you have dependents or a spouse who requires your income to make monthly payments, you should look into term life insurance. Because you can generally predict when your children will be out of the house and when your mortgage will be paid off, you may choose to purchase a policy that only provides coverage during this period of time.

Whole Life Insurance

Whole life insurance is a type of permanent insurance, meaning that as long as you pay your premiums, the policy never expires. Additionally, this type of policy has an investment component. It allows you to amass funds in a tax-deferred “savings account.”

This savings account is kind of like a hybrid between a tax-deferred retirement account and a regular savings or brokerage account. You don’t get a tax deduction on the money you put into the policy, but you don’t pay taxes on any of the growth of the money until you cash out.

So, while also providing a death benefit if you were to pass away, part of your premiums are put towards a cash-value portion of your whole life insurance policy.

The cash-value component in a whole life insurance policy provides a living benefit where you can draw upon this tax-deferred amount as the policyholder. The amount that you withdraw from your cash-value portion of the policy can be used towards retirement or to take out a loan against it. If your beneficiaries were to be subject to an estate tax, you may choose to use some of the cash-value funds to subsidize this amount so that your beneficiaries would receive the total death benefit.  

Because whole life insurance is multifaceted, you will pay a higher premium than a term life insurance policy.

Whole life insurance can cost anywhere from five to twelve times the cost of term life insurance, making this a much larger financial commitment.

Similar to term life insurance, you will have to answer questions about your demographics and health, as well as take a medical exam. 

Some people find after applying for life insurance that the only policy that will take them is the whole life insurance. This is because they have health conditions or life-style choices that an insurance company finds very risky. Tobacco use is an example of a life-style choice that may disqualify you from term life insurance.

Whole Life Insurance Pros And Cons

Positives 

  • Whole life insurance never expires. So you can keep the policy as long as you need without the price increasing, despite aging or having any health issues arise. This can be comforting for some people who worry about their health deteriorating.
  • It can be used as an asset in addition to providing a death benefit that you can withdraw against to fund future purchases or retirement.
  • A whole life insurance policy may pay out dividends. This is because when you secure a whole life insurance policy, the carrier assumes that the cash-value portion of the policy that you contribute to will increase at a certain rate. If your policy grows more than what the carrier originally assumed, they could pay you dividends, which can be reinvested or cashed out. 
  • Whole life insurance is easier to get than term life insurance for people with certain medical conditions or risky life-style choices.

Negatives  

  • The cost of whole life insurance is one of the biggest drawbacks to purchasing this type of policy. As noted, it is much more expensive than term life insurance because of the added cash-value component of the policy.
  • Furthermore, due to the cost of the policy, some may choose to purchase a lower coverage amount because the premium costs less. This could result in being underinsured. 
  • Additionally, because there are multiple components associated with whole life insurance policies, they can be more difficult and complex to secure and understand. It may take more time and research to find the best policy for your needs.
  • The savings account may not be the best investment for your money. There are far more productive and profitable ways to invest your money than through your life insurance plan.

Is Whole Life Insurance Worth It?

Whole life insurance is a good idea to secure if you are looking for an income replacement but also find value in having a forced savings component built into the policy.

You may choose whole life insurance because you want peace of mind with coverage for your whole life, or because you have an existing medical condition that makes it difficult to get term coverage.

What Did I Choose for My Family?

I personally have term life insurance because I don’t want a savings account with my insurance company. I would rather have more control over how my savings are invested.

The whole life insurance gives you a limited option of funds that they will invest your savings in. I want to be able to invest my money however I choose.

Admittedly, I did have a whole life insurance policy for a period of time, and it cost me about $450 per month at the age of 30 (I should mention here that I have asthma). Currently, I have a 10 year term life policy (at age 42) and I only pay 40 per month. I have to caveat this with the fact that I lost a significant amount of weight between then and now, which also contributes to the lower policy rate I’m paying.

I would recommend a term life insurance policy, especially if you’re young and healthy. If you choose a longer term, you can lock in that rate no matter what happens to your health over the years.

In addition, if you take the time to learn how to invest your money wisely, you will be much better off (and on your way to financial independence quicker) then by investing in the funds offered by a life insurance company. I personally like to keep my investments and my life insurance separate.

Wrapping Up

Bottom line: both types of policies will provide you and your family members with security, knowing that if you were to pass away they would be financially protected.

If you want to have an added cash-value component to your policy to add to your financial portfolio and don’t mind spending more each month, then you might be a good candidate for whole life insurance.

However, if you are just looking for financial protection for your family members for a certain period of time, then term life insurance may be a better option.

Either way, it is always best to do your research and talk to professionals or friends and family members who have purchased a policy before.

Related Articles

Life insurance should also be considered when developing your asset protection plan. Read more about asset protection in this post:

What is Asset Protection Planning (and How do You Achieve It)?

Or learn how to invest your money so you can retire early:

Big Picture Investing: Why You Need to Get in the Game Now! (Short Version)

 

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