If you’ve been thinking about how much you would like to pay for life insurance and how long you would like it to last, then now is the time to start to begin weighing your options. However, if this is one of your first readings regarding the matter, the words term life and whole life may not mean a whole lot to you.
By the end of the reading, you’ll understand what both term life insurance and whole life insurance entail, the pros and cons of purchasing each, and which one you should choose. At this point, you’re already familiar with the general practice of life insurance, wherein financial protection is provided to beneficiaries listed on the policy in the event of the policyholder’s death. Both term life and whole life have this in common, but there are several differences and stipulations that set them apart from each other.
What is Term Life Insurance?
A previously discussed, a term life insurance policy will provide what is known as a death benefit payout to beneficiaries listed on the policy. However, the policyholder must pass away within a specific period of time in order for it to do so. This is because a term life policy isn’t forever. It will expire after a given number of years, like 20, whether or not the policyholder is alive. This can be any specific life insurance policy as term life is the broad category used to describe them. Notable term life insurance policies include simplified issue, guaranteed issue, and group life insurance from an employer.
What is Whole Life Insurance?
Whole life insurance is sometimes referred to as permanent life insurance. From that alone, you should be able to gather what makes it so different from term life coverage. Whole life insurance literally lasts the whole life of the policyholder -providing coverage up until the very end. The policyholder is also given a cash value which is invested with a portion of the paid premiums. Death benefits of whole life have more uses such as estate planning and fund investments. Notable whole life insurance policies include universal life insurance, variable life insurance, and simplified or guaranteed policies.
Term Life vs. Whole Life: The Key Differences
With the introductions done, we can get to the meat of the term life and whole life comparison. Life insurance policies are defined and priced by their features. In some cases, this can go beyond just providing simple coverage.
Features that differ in term life and whole life policies are:
- Duration - As you’ve already read, policy duration is different between term and whole. The former can last a policyholder up to 30 years while the latter lasts for life.
- Cost - A lifespan is obviously longer than 30 years, so those with whole life insurance will be paying more and higher premiums than term policyholders would. Those with a term policy could pay between $25 to $35 in monthly rates, while someone covered by whole pays five to 15 times that.
- Guaranteed death benefit - Death benefit is a regularly recurring feature of life insurance. It’s the payout which the beneficiaries listed on the policy receive upon the death of the policyholder. The death benefit being “guaranteed” refers to its’ value and how it stays consistent over the policy’s life. For both term life and whole life, policies typically offer guaranteed death benefits.
- Guaranteed cash value - Term life policies don’t carry any cash value, but whole life insurance does. A cash value can be accessed by the policyholder at any time. The cash value can be used for such things as investments as a method of estate planning. It’s guaranteed because it has a fixed growth rate that functions like interest. Some, but not all, whole life insurance policies work this way.
- Premiums and insurance rates - It’s true that term life premiums are cheaper than whole life premiums, but did you know that they can also be a bit inconsistent. Term rates tend to increase periodically while whole life rates stay the same throughout its life.
The Pros And Cons of Term Life Insurance
While reading all about where term life and whole life differ, you may have been wondering, “Is that a good thing or a bad thing?” Naturally, you’ll want to know the pros and cons of a product before buying. These next two sections will explore the positive and negative of term and whole life insurance. Your first instinct may be to lean towards a term life policy because it’s the cheaper option. In addition to that, there are no hidden fees for accessing the cash value since there is none. Because of this, you are able to cancel the policy without losing any value.
For some, not having a cash value that you can profit off of is a reason not to invest in a term policy. The increasing premiums can be annoying, but they’ll never be higher than whole life insurance rates. However, the biggest reason people don’t choose term life is the fact it has a limited lifetime. Some insurance companies offer term policy conversion to a whole life policy, but that isn’t without its costs.
The Pros And Cons of Whole Life Insurance
Many are in favor of “set it and forget it” whole life insurance. It’s great to be able to live with peace of mind that your family and everyone who depends on you will be financially protected when you’re gone since a whole life policy won’t expire. Permanent and whole life insurance also are revered for their cash value and growth rate, which helps with estate planning. That’s the main difference between whole life and term life; term will cover your beneficiaries when you die, while whole life will cover your beneficiaries after you die. Cash values can also be used for loans, retirement, or put towards premiums. The policyholder can determine this.
But whole life insurance is not without its high cost. As previously mentioned, a whole life policyholder pays up to 15 times the premium amount that a term life policyholder would. For some, this is a deterrent; for others, it’s entirely worth it. In addition to those costs, there are also fees for accessing the policy’s cash value, some of which are hidden. Some investments may also have higher interest rates than others. Plus, it’s also not unheard of for a whole life insurance customer to purchase too little life insurance to accurately cover them or cancel their policy and lose all their cash value. Due to this, shopping requires some more effort.
What Are Other Policy Features of Whole Life And Term Life?
We’ve already gone over the general features of term and whole life insurance. Now, let’s dig even deeper with the more specific features of each policy. Who knows? One small difference might make a big difference for you.
Additional features of term and whole life insurance to be aware of are:
- Initial premium rates - Your first payment towards a term policy will be low and may not increase until later. It’s important to be aware to not be surprised when the great low price that originally won you over increases. With a constant whole life premium, they need not worry about it if they are able to make their payments.
- Health examination - Some life insurance policies, mostly underwritten ones, require a health exam or screening of potential policyholders. There will always be a health exam for whole life insurance, while term life depends on the amount of coverage being purchased.
- Company dividends qualification - The cash value of whole life insurance can be used as dividends for select companies by the insurance providers. With no cash value, this isn’t a feature for term life insurance.
- Accelerated death benefit - A death benefit becomes accelerated when the policyholder receives some of their payouts before the policy expires. Select policyholders usually qualify. This is a feature that is present in both term life and whole life insurance.
- Annual renewable - Term life policies are renewable by the year but come with higher premiums with each renewal.
How Does Annual Renewable Term Life Insurance Work?
As the name suggests, this type of term policy is only active for one year with the lowest possible premiums. There is an option to renew at the end of every year, but the premiums rise slightly with each passing one as opposed to the typical term life insurance. You would be able to do this for the rest of your life as opposed to a maximum of 30 years. Premiums can also increase due to a lapse in coverage. On a brighter note, the initial premiums of an annually renewable policy are lower than that of a standard term policy before they increase.
When Would Annual Renewable Term Life Insurance be a Good Option?
The average life insurance customer may choose standard term life insurance over annual renewable due to the increased premium stability and long-term commitment. But sometimes, a standard policy is out of budget, and an annual renewable would be the better option. An annual renewable is also a good option when you’re only looking for temporary coverage in the short term while saving up for lasting coverage. At the same time, you may be improving your health in order to qualify for lower premiums. Typically, if you show an improvement in health or habits for at least a year, you can save some money on life insurance or upgrade to an affordable long-term policy.
While Shopping For a Term Life And Whole Life Insurance, You Should Consider The Following
With life insurance, both term and whole life, the cost is heavily dependent on the person seeking coverage. Personal factors and future plans can all influence how much you’ll be paying for your life insurance.
While shopping for different types of life insurance policies, you should take into consideration:
- Age - Older individuals pay more for life insurance.
- Health - Medical history and underlying conditions are important factors to make a note of.
- Family’s budget - Think about your family’s financial needs and determine how much life coverage you will actually need.
- Family member’s ages - If you are a parent, how old are your kids? Are they still in school or out on their own?
- Health expenses- Relating back to health and medical history, do you pay for medication or treatments? Think about how often you go to the doctor.
- Debts - It helps to be aware of any outstanding debts you have, like a mortgage, as your life insurance policy can provide greater coverage.
- Retirement plans - A whole life insurance policy can assist with retirement planning with its cash value.
- Children’s education - Your children’s ages are important because they may still have school or college to attend. Many include an education coverage with their whole life policy in case they are not around when a family member or child goes to university.
- Funeral expenses - Whole life coverage often includes funeral expenses after the policyholder passes away. There are some instances with older policyholders where term life would also provide coverage for burial expenses.
- Planning estate and will - A whole life policy are best for those looking to plan their estates and wills after they are gone. Life insurance can also help those looking to donate a portion of their estate.
- Existing life insurance policies - You may have a life insurance policy through an employer. Let your insurer know whether or not said policy is active.
How Much Does Term And Whole Life Cost?
This is the section where we get into what the numbers of term life and whole life look like for certain age and sex groups, as it is the easiest way to categorize life insurance costs.
For men of the following age groups, they could expect the following annual life insurance premiums:
- 30 years old - Pays $4,015 annually for whole life insurance and $228 for term life insurance of 20 years.
- 40 years old - Pays $6,042 annually for whole life insurance and $341 for term life insurance of 20 years.
- 50 years old - Pays $9,432 annually for whole life insurance and $842 for term life insurance for 20 years.
For women of the following age groups, they could expect the following life insurance premiums annually:
- 30 years old - Pays $3,558 annually for whole life insurance and $193 for term life insurance of 20 years.
- 40 years old - Pays $5,413 annually for whole life insurance and $289 for term life insurance of 20 years.
- 50 years old - Pays $8,440 annually for whole life insurance and $654 for term life insurance for 20 years.
When it Comes to Term vs. Whole Life, Which One Would Be The Best Policy For You?
Which life insurance fits you the best depends entirely on you and your family, especially your health and financial needs. By now, you already have a general idea and more than enough surface knowledge to discern the difference between term and whole life with an idea of the kind of people who purchase each policy. These sections explore these on a deeper level to get an even better idea.
You would choose a term life policy if you:
- Limited income replacement - Many term policyholders are in it for the coverage over a certain amount of years. This could be the time of raising children or paying off debt. These events aren’t forever and will be resolved at some point, making them ideal for term life.
- Affordable, budgeted coverage - Even more policyholders invest in term life insurance for the lower premiums for the time being. It is especially helpful for those with an income on the rise.
- I can’t afford permanent yet - Since some insurance companies offer term life conversion to whole life policies. Many policyholders use this as an opportunity to carry life insurance until they can afford a whole policy.
- Want to invest your money how you want to - Since there is no cash value with term, the policyholder offers more freedom for people to invest their money in anything they see fit. If you believe you can make better investments than the insurance providers can, term is the best choice.
You would choose a whole life policy if you:
- Want coverage for inheritance or estate taxes - One of the biggest selling points of whole life insurance is estate planning and coverage for heirs. If you have an estate worth $11.7 million per person or $23.4 million per couple, you may be subject to hefty federal taxes.
- Have lifelong dependence - An example of this would be a child with disabilities who will continue living with you. You’ll naturally want them to be covered beyond your life, so whole life insurance can be used to fund a trust.
- Want to use retirement savings and leave an inheritance - Remember that whole life insurance covers your loved ones after you die as opposed to just when you die as term life insurance would. The policyholder and beneficiaries are entitled to retirement and funeral funds along with inheritance.
- Want to equalize inheritance - This is a specific case wherein if you decide to leave an inheritance for one child or beneficiary, any other child will also be compensated with whole life insurance.