Term and Whole Life Insurance: What’s the difference?
Term and Whole life insurance have long been among the most prominent policies known to man. Here we explore their differences and look into what sets each apart.
Whole life insurance provides permanent protection as long as premium payments continue, accruing money value you can withdraw or borrow against while alive. 4.5% to September 11 increase in costs each year as you age, provided your health remains the same.
Term insurance policies cover an individual for only a certain number of years (the term), without accruing any cash value over time.. Only 27% of US adults carry term coverage; many only have cluster coverage which often needs more. Furthermore, new variants exist, such as universal life (UL).
Whole life insurance
Whole life insurance, also known as permanent life insurance, is a type of life insurance policy that provides coverage for the entire lifetime of the insured individual.
Unlike term life insurance, which only provides coverage for a specified period, whole life insurance remains in force as long as the premiums are paid.
Advantages of whole life insurance
Whole life insurance covers the entire duration of the insured person’s life as long as the premiums are paid.
It means the policy will pay out a death benefit to the beneficiaries upon the insured’s death, regardless of when it occurs.
Cash value accumulation
One of the distinguishing features of whole life insurance is the accumulation of cash value over time. A portion of the premiums paid goes towards building cash value, which grows on a tax-deferred basis.
The policyholder can access this cash value through policy loans or withdrawals during their lifetime.
Whole life insurance typically has level premiums, meaning the premium amount remains the same throughout the policy’s life.
Premiums for whole life insurance are generally higher than term life insurance because they cover the insured’s entire lifetime.
Whole life insurance provides a death benefit to the beneficiaries upon the insured’s death. This benefit can cover funeral expenses, replace lost income, pay off debts, or give the insured’s loved ones financial security.
Some life insurance policies may be eligible for policy dividends. These dividends are a share of the insurance company’s profits and can increase the cash value, reduce premiums, or purchase additional coverage.
Term life insurance
Term life insurance is a type of life insurance that provides coverage for a specific period or term, typically ranging from 10 to 30 years. Unlike whole life insurance, term life insurance does not accumulate cash value.
Life Insurance policies are intended to provide your beneficiaries with a death benefit should you pass away during the policy term.
Advantages of term life insurance
Term life insurance tends to have lower premiums than whole life insurance, especially for younger and healthier individuals. This affordability can make obtaining coverage easier and fit within your budget.
Temporary coverage for specific needs
Term life insurance often covers specific financial obligations or conditions within a defined time frame.
For example, you can purchase a term policy to ensure that your mortgage is paid off and your children’s education expenses are covered or to provide income replacement during your working years.
Term life insurance policies offer flexibility regarding the coverage duration. You can select a term that aligns with your needs, whether 10, 20, or 30 years.
It allows you to tailor the coverage to match your anticipated financial obligations and when you need it the most.
Term life insurance is typically easier to understand and less complex than other types of life insurance, such as whole life or universal life insurance.
The focus is on providing a death benefit during the specified term without additional features or cash value accumulation.
Many term life insurance policies offer the opportunity to convert to a permanent life insurance policy, such as whole life or universal life insurance, without needing a new medical exam or proof of insurability.
It can be beneficial if your insurance needs to change or if you decide you want lifelong coverage down the line.
Term life insurance or Whole Life Insurance: that is better?
The choice between term and whole life insurance depends on your needs and financial goals.
Let’s explore the characteristics of each type to help you understand the differences and make an informed decision.
Term Life Insurance:
Premiums are generally lower than whole life insurance, especially for younger and healthier individuals.
It only pays a death benefit if the insured passes away during the policy term.
No Cash Value
Term life insurance does not accumulate cash value over time.
It is a straightforward and affordable option for those primarily seeking to protect their loved ones financially in the event of their death.
Whole Life Insurance
Whole life insurance provides coverage for the insured’s entire lifetime.
Premiums are higher than term life insurance, but they remain level throughout the policy’s life.
Cash Value Accumulation
A portion of the premiums paid goes towards building cash value over time, which can be accessed through policy loans or withdrawals.
Whole life insurance often includes an investment component, such as dividends or interest, which can grow the cash value further.
Choosing the better option depends on your specific circumstances and financial goals. Suppose you temporarily need coverage, such as paying off a mortgage or supporting dependents until they become financially independent.
In that case, term life insurance may be more suitable due to its affordability. However, whole life insurance could be a better fit if you are looking for lifelong coverage, cash value accumulation, and potential estate planning benefits.