Whole vs. Term Life Insurance | What’s Better?
Whole vs. Term Life Insurance | What’s Better?
These are two common life Insurance. Buying life insurance now provides a financial safety net for your dependents later if you’re not around to take care of them.
After you’re gone, your family can use the proceeds to cover funeral costs, mortgage payments, college tuition and other expenses.
Understanding the difference between term and whole life insurance policies( Whole vs. Term Life Insurance) helps you decide which one is right for your situation.
What Is Term Life Insurance?
Term life insurance is an insurance policy that provides coverage for a specific amount of time, such as 5, 10, 15, 20 or 30 years. Most term policies range from 1–30 years. If you purchase this type of policy and die during the coverage period, the insurance company pays a death benefit to whomever you’ve named as the beneficiary of your policy. If you’re still alive when the policy ends, the insurance company pays nothing and the coverage stops.
Features of term life insurance
- Provides death benefits only
- Pays benefits only if you die while the term of the policy is in effect
- Easiest and most affordable life insurance to buy
- Purchased for a specific time period, such as 5, 10, 15, or 30 years, known as a “term”
- Becomes more expensive as you age, especially after age 50
- The term must be renewed if you want coverage to be extended beyond the term length
- Can be used as temporary additional coverage with a permanent life insurance policy
- Can be converted to whole life insurance
What is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance. It’s also the most common, according to the Insurance Information Institute (III). Like most permanent life insurance policies, whole life offers a savings component, called “cash value,” and life-long protection — as long as premiums are paid, whole life provides a death benefit after you die. Certain aspects of whole life insurance can make it an appealing choice.
Features of whole life insurance:
- Covers you for life
- Provides death benefits as well as a cash value accumulation that builds during the life of the policy
- You typically must qualify with a health examination
- Can be purchased without a medical exam, but at a higher cost
- Takes 12 to 15 years to build up a decent cash value
- Can be a good choice for estate planning
- Cash value is based on how much the return on investment is worth
- A portion of the cash value can be withdrawn or borrowed during the life of the policy
- Initially has more expensive premiums than term life insurance, but can potentially save you money over the life of the policy if in force for a considerable number of years
Which one is better? Term Life or Whole Life?
Although term life insurance premiums are initially inexpensive, they increase over time. Your premium may increase at specific intervals during the life of the policy, or you may discover you can no longer afford the coverage when you try to get a new policy. Premiums for whole life insurance policies are comparatively more expensive at the start of the policy, but they remain the same for the duration of the policy.
Both term and whole life insurance policies pay what’s known as a guaranteed death benefit when you die. When you purchase the policy, you choose the amount of coverage you want. The company then pays that amount to your beneficiaries, and they can use it however they want.
In addition to the death benefit, whole life insurance policies have a cash value that accumulates the longer the policy is in effect. You can borrow against this cash value if you need money to cover an emergency expense, or you can cash in the policy at any time and receive it as a lump sum. Some whole life policies also pay dividends. Term life insurance policies don’t offer this option. Take a look at the chart below to get a better idea of what the different policy types offer.
Whole life insurance provides continuous dividends unlike term life insurance, which can be claimed only once at the time of the expiry of the policy. However, the dividends of whole life insurance remain constant.
Take a look at the chart below to get a better idea of what the different policy types offer.
|POLICY FEATURES||TERM LIFE INSURANCE||WHOLE LIFE INSURANCE|
|Choice of length of policy||Yes||No|
|Provides lifelong coverage||No||Yes|
|Premium generally remains the same||Yes||Yes|
|Low annual premium||Yes||No|
|Life insurance payout amount is guaranteed||Yes||Yes|
|Accumulates cash value||No||Yes|
|Might be eligible for annual dividends||No|
Should You Convert Your Term Life to Whole Life Insurance?
Most term life insurance policies allow you to convert your term policy into a permanent life insurance policy such as whole life insurance. Is this the right thing to do? Some of the reasons it may be a good idea to convert your term policy to a whole policy include:
- Your term life policy is about to expire and you are in your 50s or 60s.
- You want to extend your life insurance coverage, but term insurance may no longer be available or has become very expensive due to your current age.
- You are setting up an estate, or you are concerned about estate taxes.
- You are setting up a trust in your will.
- You need a non-taxable investment option.
Converting term life to whole life insurance can be an excellent way to continue your life insurance policy and also build cash value that you can borrow from. There are many different ways to structure this type of policy, depending on your needs and goals, so be sure to work with a life insurance professional who can answer all of your questions and help you make the best choices.
Should You Buy Both Whole Life and Term Life?
You can own both whole life and term life policies at the same time. People who are looking at this option typically already have a whole life policy. However, they may find that they want additional short-term insurance coverage such as for 10 years. In this instance, buying a term policy for the amount of life insurance you need for that extra protection can be a good solution.
Or, you may already own a term policy and find that you want to invest some additional money into a long-term investment for retirement purposes or because of estate issues. In this instance, buying a whole life policy which has a cash value accumulation feature may be the way to go.
Now that you know the differences between term life insurance and whole life insurance, you can make an informed choice to find the best life insurance solution for you and your family.
Buying a life insurance policy is an important financial decision and one where you will likely benefit from talking to a professional. In addition to simplifying your online shopping experience for insurance products, Life Exchange Insurance Services is dedicated to providing you with smart, timely advice as your needs for financial protection evolve.
So, call us 904-203-1763 today.