Life changes quickly, especially if you’re just now starting your adult life. Perhaps you’ve recently tied the knot or a little mini-you is on the way (congrats!). In either case, your financial situation is likely to change drastically over the next couple of years, never mind decades. So, too, will your insurance needs.
You may be wondering what the difference is between a whole life vs term life policy. Before we get into the nitty-gritty of which one might work best for you, let’s look at what term and whole life insurance coverage have to offer.
- There are benefits and drawbacks to each.
- Term life insurance is typically more affordable, while whole life doesn’t expire after a set period of years – but it’s more expensive.
- Both options have merit – and the choice depends on what you value for your loved ones.
Article Highlights
- Term insurance v. Whole Features
- Term insurance v. Whole Cost Comparison
- Choosing Term or Whole
- Other Life Insurance Options
High-Level Differences Between Term and Whole Life Insurance
The two basic types of life insurance are term and whole, which differ in length of coverage. Term lasts as long as you’ve agreed with your provider. Whole life can offer a guaranteed payout upon your death. But it’s not as simple as selecting a sure thing.
Term Life Insurance – This is designed to provide ample coverage at a time when you’re most financially vulnerable. And because it expires at the end of your term, it costs significantly less than a whole life insurance policy.
Whole Life Insurance – Because whole life insurance is in force for as long as you’re alive (and pay your premiums), your beneficiary will always receive the death benefit, no matter how old the policy. This can mean fairly intimidating premiums for some applicants.
What Is Term Life Insurance?
A term life policy covers a specific time period and is intended to provide death benefits in the event of premature death. While you must keep up with monthly premium payments, it only retains value if you pass away during the term.
The Benefits of Term Life Insurance
You know yourself best. Term life insurance coverage is a great option for most American adults, especially if you have a tight budget. With a term policy, you’ll enjoy the benefits of:
- Choosing your term length. Perhaps 30-years makes sense if you’ve taken out a mortgage. Or a 20-year term suits someone who just had a baby.
- Getting more affordable rates that comfortably fit into your monthly budget.
- Some degree of financial resiliency should you pass prematurely during your term.
- Oftentimes, no exhausting, intensive application process – even sometimes skip the medical exam.
Drawbacks of Term Life Insurance
While the lower price and flexible terms can make term enticing, there are a few reasons to think twice about your choice.
- The life of your policy expires at the end of the term. You can’t always add on coverage, but often must reapply, with new rates.
- If you do outlive the term, without a return of premium rider (a more expensive agreement where your premiums are returned to you at the end of your term), the money you’ve paid for a number of years is gone.
- You can sometimes add a return of premium rider to your policy that you get part or all of your premium payments returned back to you. However, these policies are more expensive.
What happens to term life insurance at the end of the term?
At the end of a term, a policy simply expires. Policy holders sometimes have the chance to re-up their coverage, but not always. Ideally your major expenses are paid off, the kids are on their own, and the financial peace of mind you get from insurance is no longer necessary.
What Is Whole Life Insurance?
Whole life insurance is exactly what it sounds like: it’s insurance that lasts for your whole life (except it’s actually more complicated than that). It’s often called permanent life insurance, for obvious reasons.
- You get lifelong coverage, which provides a payout to your beneficiaries on your eventual death.
- May include an investment component with policy cash value – and this is generally tax-free money.
- You can often borrow against the account for major or unexpected life expenses.
- And some policies allow you to sell or transfer ownership – where someone else pays your premiums and collects the death benefit.
A little more on the cash value: these are the “living benefits” provided by whole life insurance. A part of each premium payment contributes toward growing the policy’s cash value. You can tap into your cash value to take out a loan, pay your premiums, or surrender the policy for its cash value amount.
Benefits of Whole Life Insurance
Outside the obvious appeal of the cash value benefit, a whole life policy is a great choice for individuals looking for a guarantee, and want the financial protection that comes from knowing you have a policy to last your entire life.
- There’s no term. It is permanent coverage as long you’re making payments.
- Just like term life, the death benefit is guaranteed to be paid out tax-free to your beneficiaries if you die within the term period (and claim is approved).
- Premiums grow tax-deferred cash value from which you can withdraw or borrow.
- Guaranteed death benefit as long as you make payments
- Premiums can build cash value and the policy’s cash value grows with time
Drawbacks of Whole Life Insurance
It should be clear by now that for many people seeking life insurance, the appeal of whole life is often tempered by the cost.
- You’ve got to pay more in order to get more out, so you’ll pay higher premiums.
- Many surrender their policies and incur fees to cancel their coverage.
- Using the cash value can reduce the death benefit (if loans are not paid back), subject you to taxation, or result in the surrender of the policy.
- You may find yourself making large payments for a policy you don’t really need in your later years. Your beneficiaries may have acquired wealth. They may proceed you in death. Your mortgages and other debts may be paid.
Comparing Term vs. Whole Life Insurance Policy Coverage
Let’s look at what term and whole life insurance offer side-by-side for a clearer picture. There are trade-offs with selecting either, but once you’ve decided what’s most important you can begin to balance some of those tradeoffs.
| Policy Features | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Length | 1-30 years | Entire Life |
| Cost | $25-35/mo on avg. | 5-15X the $$ of term |
| Death Benefit | Yes | Yes |
| Cash Value | No | Yes |
| Cash Value Growth | N/A | Grows at an established rate. |
| Premium Variability | Fixed or variable | Fixed |
Comparing Cost of Term and Whole Life Insurance
A whole life insurance policy can cost 5 to 15 times as much as term. But if you start adding riders and other insurance options to a term life insurance policy, your life insurance premiums can still increase significantly.
Term life insurance policies are a good option if you only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage. It’s going to be your most affordable coverage.
With whole life or entire life insurance costs being out of reach for some, choosing term is a way for even those with little money available for premiums to manage some level of coverage for their family. And if your circumstances change, many term policies offer the option to convert to whole.
But whole life can make a lot of sense for some people who simply can’t imagine all of their premium payments being sunk costs. Others want a low-risk means of passing on tax-free wealth to their heirs. (We strongly recommend consulting a financial advisor on how an insurance policy might fit into your financial plan.)
If your expenses or debts aren’t short term, permanent life insurance can make sense. A family with a dependent child may choose whole life to help fund their care.
And of course, it’s possible that you just want to ensure your final expenses aren’t a burden on your family, but you want to blow all your own hard-earned money sipping piña coladas on a remote beach before you go.
Life Insurance FAQs
What does life insurance cover?
Life insurance covers any financial needs encountered by those who may have depended on your income should you pass away. At a minimum, it can help with funeral costs and final expenses.
How much does life insurance generally cost?
Term policies can be as little as $1/day, depending on several factors including courage amount, term length and your answers to health and lifestyle questions. Whole life can have a 5-15X higher cost.
Can I convert a term life insurance policy into whole life insurance?
Some term life policies allow policy-holders to convert their policy into a form of permanent life insurance, often without further medical exams. You should ask this of your insurer before purchasing a policy.
Which one is ultimately better?
There is no “better” type of policy, only a “better-for-you” policy based on your family’s unique needs.
Get Your Free Life Insurance Quote
You can get a term life insurance quote in seconds and your actual rate from Bestow in just minutes (if approved). It’s entirely online if that’s what you’re into. If not, we have licensed, non-commissioned agents standing by to help advise you. It’s entirely up to you.
There’s no better day than today to start looking at your insurance coverage options and get a fast, free quote on convenient term life insurance policies with Bestow. Taking the first step might provide you with some peace of mind. And applying for coverage might provide your family with financial resiliency in the future.
