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Term vs Whole Life Insurance: Let’s Break it Down

Life Insurance

The basic concept behind most life insurance is that you, or your heirs, can receive money from a policy if you die during a certain period of time. Life insurance works by pooling many small premiums from many people to form a large death benefit that you may use should tragedy strike. There are two primary forms of insurance: term and whole. Both have a death benefit but there are some key differences.

What is term vs whole life insurance? Let’s explore.

What Is Term Life Insurance?

Term life insurance is the purchase of a death benefit for a period (or term) of time. That’s why it’s called “term” insurance. Think of your mortgage. When you buy a home, you borrow the money for a period of time. You may have a 30-year loan or a 15-year loan, but the “term” is how long the loan is designed for. With term life insurance, you can get 10, 15, 20 and even 30 years of a level and locked premium that will not go up or down regardless of if you get sick or not. If you or your spouse pass away at any point during those 20 years, the full death benefit pays out to your beneficiaries (the people you specified who would inherit your money).

Term insurance is the simplest form of life insurance.

What Is Whole Life Insurance?

Whole life insurance is a little more complicated. It has two key differences from term. First, whole life does not go for a certain period of time but is designed to last the rest of your life, no matter how long you live. As long as you’re current on your premium payments, your whole life policy will pay out in the event of your death. The second key difference is that whole life policies also build a cash value. Cash value is a savings component in which some of your premium payment accumulates with interest on a tax-advantaged basis. These policies, which may be referred to as “traditional” life insurance, are permanent and provide death benefit coverage for the rest of the insured’s lifetime.

Which One is Right for Me: Term or Whole

To decide which of the two directions is best for you, it’s important to understand the pros and cons. Term plans are more affordable. Because the term life policy has no cash value and only provides a death benefit, it is far less expensive than a whole life plan. The policy is of no value in layman’s terms unless the insured dies during the term period. It’s very possible (and even likely) that you will outlive your term policy. If you do, you will get nothing back from the premiums you’ve been paying over all those years. Much like renting, it’s there as long as you’re paying for it and only pays you in the event of a death (or chronic or critical illness, but that’s a subject for another day).

When an insured person passes away, the term life insurance carrier pays out the death benefit check, typically in one lump sum. The money paid out is one of the few things in life that is tax-free. The beneficiaries are able to use the funds for whatever they like, including funeral costs, bills, mortgage payments, college funds, and more. Term life insurance is a smart way to keep your family in a good position financially should tragedy strike the breadwinner.

Of course, the primary goal is that you will never have to utilize your term life insurance policy—but if something happens, at least you know your loved ones will be looked after. They’ll miss you, but they won’t worry about how they’re going to pay their bills.

Compared to Term Life Insurance, Whole Life Plans are more expensive because they offer guaranteed coverage for your entire lifetime with a locked rate and premium. Over time, your cash value will grow and you should receive statements regularly showing the growth. That cash value is yours to borrow or loan against at any time without penalty.

When compared to term, a whole life plan can be 3-4 times more expensive. Often, whole life plans are smaller to keep the premium down. For example, if someone is considering a $300K term policy, she may look at a $75K – $100K whole life policy in the same price range, depending on her age and health conditions.

While many carriers do not require you to have perfect health, both term and whole life policies have underwriting requirements that must be met in order to qualify for coverage. A good agent can help you navigate the underwriting process and make recommendations that are most likely to accept your case. If you have health conditions or are overweight, you may be surprised at what carriers will still offer you. Contact a reputable independent insurance agent and ask him for the best recommendations. It doesn’t cost you to find out what your options are.

What to consider before you buy a whole or term-life policy

Each person is different, and the choice to purchase a whole or term policy should be determined by your unique circumstances in life as well as the things that matter to you, such as (but not limited to) your:

  • What is your age?
  • How good is your health?
  • What are your family’s financial needs?
  • What are the ages of your children?
  • Are you concerned about long-term health expenses and serious illness?
  • What is the amount of your mortgage and other debts?
  • What are your retirement plans?
  • What post-high-school plans do you have for your children?
  • How will you pay for funeral expenses?
  • Are you concerned about estate planning and tax ramifications?
  • Are you setting up a trust as part of your will?
  • Do you want to leave part of your estate to charity?
  • Do you have existing life insurance?

Understand the differences between term and whole life policies. If you need further ideas or explanation, ask an independent agent for help. Your life insurance policy is one of the most important documents you will ever own, so it’s critical to get the right coverage and understand what is included.

RELATED: 10 Questions to Ask When Considering Life Insurance

If you wait until you NEED life insurance, it may be too late to qualify for any

Life is valuable. Every day is a day you can never get back. While you may be young and healthy now, you never know when you may wake up to a health condition that can keep you from qualifying for a great policy at a great rate. The time to get your life insurance in place is now, while you’re the youngest (and likely healthiest) you’ll ever be. Rates will only get higher with age and conditions will continue to limit your options as you age.

If you’re considering coverage, don’t wait. Secure something in place for now and continue to research new and better options. You are always free to cancel and replace your policy down the road as long as you continue to qualify. But something is better than nothing. There are countless stories of families who are devastated because the breadwinner waited too long to take this important step.

To get the process started, you can get a FAST, FREE and PERSONALIZED quote here. It just takes a minute or two of your time, but your family will appreciate your decision for years to come.