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Term Life And Whole Life Insurance: Which Is Better? Photo KnowInsiders

What is term life insurance?

The way term life insurance works is simple: It covers you for a fixed period of time, such as 10 or 20 years, and pays out if you die during the term. If you outlive the term and your coverage ends, your beneficiaires don’t receive the money. With most policies, the death benefit and your insurance premiums stay the same throughout the term.

Ideally, the length of your term life insurance should match the financial obligation you’re covering. For example, if you're a new parent, you might buy a 20-year policy to cover you until your child no longer relies on you financially. All of the best life insurance companies sell term life, so it’s easy to find and compare life insurance quotes online.

The benefits of term life insurance

Low initial cost. Term insurance can be purchased in large amounts for relatively small premiums.

You can match term insurance to needs, just like whole life. Many people are concerned about paying off their mortgage, providing money for higher education or replacing a portion of their income if they pass away. These are typically temporary needs, which may last just a few years, or much longer. Matching these needs, with the proper amount of insurance, can allow your loved ones the time, and money, needed to make important financial decisions.

Convertible. Most term policies can be converted (age limitations typically apply) to a whole life policy if your temporary needs evolve into lifetime needs.

The reality of term life insurance

The policy is temporary. Term insurance is designed to last for a specific amount of time (term). After the term period is over, many policies are guaranteed to renew on an annual basis at a higher premium, and may become unaffordable.

What Happens to Term Life Insurance at the End of the Term?

At the end of your term life insurance policy, you may have a few options. If you still need coverage for your family, your plan may be renewable for a while.

You may also have a term plan with a convertibility feature. This means that your term policy can be set to convert to permanent insurance when the term ends. This can be a great way to have insurance for the years you need it most, but still be able to get lifetime protection with a policy that builds cash value.

What is whole life insurance?

Whole life insurance is the most common type of permanent life insurance and costs more than term life. This is because it offers lifelong coverage and pays out regardless of when you die. It also has an investment component called a cash-value account. A portion of your premiums are paid into the account, and it grows over time. Once you’ve built up enough cash value, you can borrow against the account or surrender the policy for cash.

Although it’s more complicated than term life, the way whole life insurance works is more straightforward than other types of permanent life insurance. Premiums remain the same for as long as you live, the death benefit is guaranteed and the cash-value account grows at a guaranteed rate.

Benefits of Whole life insurance

Whole life insurance provides a death benefit throughout your life. It also includes a cash value component that accrues value over time, allowing you to borrow or withdraw funds as needed.

Lifetime coverage. A whole life policy covers the rest of your life, not just a stated term. As long as your policy is in force when you pass away, your beneficiaries will receive a death benefit.

Build equity. Over time, a portion of the premiums you pay for a whole life policy become part of the policy's cash value. Once sufficient cash value has accrued, this cash value becomes available to you through loans and withdrawals. Any way you choose to use it — if you choose to use it — the cash value of a whole life policy provides an additional asset for your family. However, there can be consequences when you access cash value depending on the action and how you access the money.1

Premium options. With a traditional whole life policy, premiums are typically paid until age 100, but there are policies with a limited payment period where the premium is fully paid in a specific number of years.

You may receive dividends. The insurer may pay dividends to whole life policy owners, depending on the company's financial performance. Dividends can be paid in cash, accumulate at a competitive interest rate, purchase additional insurance within the policy or even be used to reduce the premium. Although dividends are not guaranteed, the possibility of earning dividends is an attractive feature of whole life policies.

Estate planning. It's not just for the wealthy. Many people want to leave assets for the next generation, do charitable giving or provide for an individual with special needs. Whole life insurance can be an efficient way of passing money onto the next generation.

The reality of whole life insurance

Higher initial premiums. Whole life insurance has a higher initial premium than an equal amount of term insurance, but don't confuse cost with value. The benefits of lifetime coverage, and over time the guaranteed cash value and the eligibility to earn dividends, makes whole life a good choice for building an additional asset class and for providing for lifetime needs.

Term vs. whole life: Policy features

Photo Insurance Geek
Photo Insurance Geek

Policy feature

Term life

Whole life

Choice of policy length

Accumulates cash value

Provides lifelong coverage

Premiums typically stay the same

Might be eligible for annual dividends

Life insurance payout amount is guaranteed

Low premium

READ MORE: Best Tips To Purchase Health Insurance

Term vs. whole life: Cost Comparison

Term life insurance is cheap because it’s temporary and has no cash value. Whole life insurance premiums are much higher because the coverage lasts your lifetime, and the policy grows cash value. Here’s how much annual premiums compare for a $500,000 policy of term life insurance vs. whole life.

Person covered

20-year term life

30-year term life

Whole life

Male, 30

$229.

$358.

$4,308.

Female, 30

$193.

$300.

$3,802.

Male, 40

$341.

$595.

$6,388.

Female, 40

$289.

$476.

$5,467.

Male, 50

$840.

$1,506.

$9,875.

Female, 50

$654.

$1,137.

$8,347.

Average of three lowest prices available in each category for healthy men and women. Source: Quotacy. Age is at time of issuance. Premiums stay level throughout the length of the policy.

What Is Better: Term Life or Whole Life Insurance?

Photo Insurance Geek
Photo Insurance Geek

The main difference between whole life and term life is that term life insurance provides temporary coverage for a specific period while whole life provides coverage for your entire life. With term insurance, a death benefit is a primary feature. But whole life policies combine both a death benefit and a savings feature.

An advantage in getting term insurance is it’s often less expensive because it doesn’t include the additional benefit of having a savings account. The downside is that at the end of the term, the policy will have no value.

The major advantage with whole life insurance is you can invest in, borrow against, or withdraw money from the policy while you’re still alive. This money comes from the cash value that the policy builds over time. The drawback is it usually takes a long time to build cash value for most policies, and can even take decades.

Term Life

Whole Life

Basic type of life insurance

More complex type of life insurance

Maximum term policy sold is usually a 30-year plan1

No limit on the amount of years you can purchase since coverage lasts for a lifetime, as long as premiums are paid

Death benefit is paid to beneficiaries only if you die with an active policy—e.g. If you have a 20-year policy, a death benefit is paid if you die during those 20 years or your policy has been renewed after 20 years and is still active

Death benefit is paid regardless of when you die, as long as the policy is active

Cost starts out low, but may become expensive later in life—e.g. If the term ends at age 55 and you renew, it may be expensive since you’re older

Cost starts out high but may get lower over the life of the policy

Premiums for most plans remain the same only for the term—increases when you renew

Premiums for the most common type of plan stays the same for the life of the policy

Typically provides more insurance protection per dollar

Usually provides less insurance protection per dollar in the early years of the policy

Death benefit can stay the same, increase, or decrease depending on the type of plan

Death benefit typically remains fixed as long as the policy is in force

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Term Vs. Whole Life Insurance: Factors To Consider

Photo Amica
Photo Amica

Purchase term life insurance if you:

-If you only need life insurance to replace your income for a limited amount of time, like the years that you’re paying off your mortgage or raising children.

-You want the cheapest coverage.

-You can’t afford whole life insurance now but want it later. Most term life policies ARE convertible to permanent coverage.

Purchase whole life insurance if you:

-You want to reduce estate taxes on the inheritance for your heirs.

-If you have a child with disabilities, life insurance can help fund a trust to provide care for that child.

-You want to leave money aside for final expenses, such as funeral costs.

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