Whole Life Insurance vs. Term Life Insurance

by Bethany
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You want to ensure your loved ones will be protected financially if something happens to you, and that’s what all types of life insurance offer. Life insurance at its most basic is a type of insurance that pays out a death benefit to beneficiaries on the death of the insured individual. In exchange for this death benefit, you pay premiums.

Life insurance can help your loved ones with the financial burdens they will face when you are gone. It can be used for any purpose by beneficiaries, but it’s most commonly used to pay off a mortgage, pay down debt, cover educational plans for kids and grandkids, cover funeral expenses, and replace lost income.

Whole Life Insurance vs. Term Life Insurance

The costs associated with life insurance depend on many factors, including your age, health, medical conditions, gender, and type of policy. With term coverage, you may be barred from taking out a new policy or getting a term that goes past the age of 65. This is why many seniors opt for whole life coverage instead, which also offers a savings component.

There are two main types of life insurance: term and whole. Both options provide a death benefit to beneficiaries, but there are many important differences to understand. Here’s what you should know about the differences between term and whole coverage.

What Is Whole Life Insurance

Whole life insurance, also known as permanent insurance, pays a death benefit as long as you keep up with premiums. There are no terms or expiration dates. A permanent insurance policy is usually more expensive than a term life policy, but it can offer other benefits, including a cash value or savings component. Whole insurance can help you meet your goals with consistent premiums and a guaranteed accumulation of your cash value. Because whole life policies accumulate cash value, you have the option of taking out a loan against your policy.

Whole life insurance comes with many options. A traditional whole insurance policy has a death benefit for beneficiaries and a premium that remain fixed for the policyholder’s life. Another option is universal life insurance. Universal coverage offers flexibility in your death benefits, premium payments, and your policy’s savings component. You can pay premiums monthly or adjust the amount and frequency as needed, even stopping premiums and using the cash value to cover them temporarily.

You also decide how much of your premiums will go toward your death benefit and how much should go toward the investment aspect. There are a few other ways to customize your policy. With variable life coverage, your policy will combine death benefits with a savings aspect that allows you to invest in many options like money market mutual funds, bonds, and stocks to potentially grow the value of your policy quickly. Variable-universal coverage offers the same risk and reward of a variable life policy with the ability to adjust the death benefit and premiums as with universal life coverage.

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What Is Term Life Insurance?

Term life insurance is the most popular type of life insurance policy. With this option, your policy will have a coverage term that may be 5-40 years. 10-, 20-, and 30-year term policies are most common. Your policy will only pay a death benefit if death occurs while the term is in place. Once the term expires, you may have the option to renew your policy or let your coverage lapse. Term life insurance is the most affordable way to buy a sizable death benefit because it only covers you for a specific time period. The premiums for this type of policy may increase at predetermined intervals like every year or every 10 years. It’s designed to provide protection during the years in which you need it most.

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Who Needs Whole Life or Term Life Insurance?

Because it has a limited period of coverage, term life insurance is geared toward people in their 20s, 30s, and 40s, especially adults with dependents who rely on them financially. While young, term insurance offers a large death benefit at an affordable price. Most people also have higher insurance needs in this stage of life as a family may be left with a mortgage, debt, child care expenses, and the loss of a primary wage earner. Whole life insurance is more popular with older adults and seniors. In this stage of your life, you may be most interested in permanent life insurance with a guarantee that your loved ones will receive money, no matter how long you live. Whole insurance also includes a savings and investment component that you can borrow against as you age.

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Benefits of Whole Life Insurance

Whole life insurance isn’t the best fit for everyone, but it’s popular with older adults for many reasons. Here are the biggest pros of whole insurance.

  • Permanent protection. All you need to do is keep up with payments to ensure your policy will not expire or go down in value.
  • Your premiums stay level. The amount you pay for your whole policy will not go up.
  • The policy has a cash value. This is one of the most important pros of permanent life insurance. A percentage of every premium you pay helps build cash value. You can take out a loan whenever you need to, including during retirement, against your policy’s accrued value.
  • Guaranteed benefit for family. Your loved ones are guaranteed to receive a specific death benefit.

There are some cons, however. Whole insurance tends to be much more confusing than term coverage. It also tends to be much more expensive than term insurance in terms of premiums.

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Benefits of Term Life Insurance

There are many reasons to consider term life insurance:

  • Affordable premiums. Term insurance is the most affordable form of life insurance available because you are only paying for the death benefit with no savings component.
  • Convertibility. Sometimes a term policy can be converted to a whole policy to retain coverage.
  • Good choice for paying debts of your estate, such as a mortgage or funeral costs.

There are cons to consider. A term policy will not accumulate cash value. Your premiums will also increase every time you renew your policy. Remember that coverage only exists for the term of your policy; once it expires, your loved ones will not receive a death benefit. Term insurance is usually age restricted. If you are over 65, you likely cannot qualify.

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Choosing a Policy

Choosing the right insurance policy can be challenging, especially with so many options available. Start by considering your family’s financial needs and long-term plans once you’re gone to choose an adequate level of coverage. Will loved ones need to pay off debt? Do you want to help with the education of a child or grandchild? What about funeral expenses? The next step to determining which type of insurance best fits your needs. If you are interested in building cash value that can potentially grow the value of your policy — or you exceed the maximum age for term life insurance — a permanent life policy makes sense. If you are relatively young or in good health, a term policy will likely be the most affordable way to get a significant death benefit.

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Monthly Payments

There are many factors that determine your monthly payments or premiums. Men always pay more for life insurance than women of the same age, health, and other risk factors. Whole life insurance is almost always more expensive than term insurance. Age is another big factor. The longer you wait to buy life insurance, the more expensive it will become. Other factors that can influence insurance costs include: whether you use tobacco products; whether you have a pre-existing medical condition like diabetes, high blood pressure, or obesity and how well it’s managed; family history of medical problems; and the term you choose (with term policies) or the type of whole insurance. You can even reduce your life insurance cost by making annual payments rather than monthly.