Let’s talk about something that I get asked on a very basic level: the two main types of life insurance. This is life insurance 101. The question is: what is the difference between term and whole life?
Two main types of life insurance: Whole and term
If you talk about traditional life insurance, you’re probably talking about whole life. Now, I don’t know which one was started first. I think they came about the same time. I think it was in the late 1700s that Presbyterian ministers needed some fund for their spouses. And so they started this and it became life insurance.
It actually started back in the Romans in six or 700 AD. It was the first time that we have recorded history of something akin to life insurance. It’s evolved a lot, but today there’s two main types. There’s whole and there’s term. Everything else is a variation of one of those two. Now, you’re going to hear about all kinds of different products out there. At their core, they’re either whole or term or they’re built on that foundation. Let’s understand what that is. Okay?
First, whole life is permanent
The easiest way to think of the difference between whole and term is whole life is permanent, which means it’s never going away. Whole life is ideal for when you die. I don’t know anybody here on this planet that is getting out of here alive. We’re all going to die. It’s a matter of when.
If you want a policy that’s going to pay out and you don’t ever have to worry about when you die, it could be now, it could be when you’re 110 years old, that policy would be a whole life policy because it is a permanent policy.
Now, another interesting thing about permanent policies is they build cash value. So part of your premium goes into a cash value account. There are a couple of things in that policy more expensive: the value of permanency and the cash value growth. Something to note about whole life is it is more expensive than term.
Now let’s talk about term life insurance
When you think term life insurance, think temporary. Whole life is permanent term is temporary. Just like your mortgage, for example. Let’s say that you bought a home and you had a 30-year mortgage. And you need coverage, in case you die, to make sure that the house is taken care of for your family. Maybe you have a $300,000 mortgage and you want to put a life insurance policy in place for 300,000 for the life of that mortgage.
After the 30 years, you’re good. Maybe you’re self-insured, maybe you’ve got coverage or other assets or things in place where you don’t need life insurance anymore, an ideal product would be term. Even though there’s a high likelihood that it never pays out, it’s there in case you die, in case. Whole life is there when you die, whereas term is there in case you die.
Term coverage can have a lot of side benefits
They’re called riders that you can add to your policy, but a term policy could be for 10 years, or 15 years, 20 years, whatever you choose. Now, I hear sometimes people talking about the coverage they have. Term coverage that goes the rest of their life. There’s some confusion in that because the rate is only locked for a period of time. That rate lock is going to be for 20 or 30 years. Technically, you can keep the policy longer. But the only policies guaranteed to go the rest of your life are whole life policies.
Make sure you check yours, to renew that policy and keep it going at higher rates in batches of years, something called banding. You could have that, but with most policies, at the end of that 20-year term expiration date, you can keep it. So you could go all the way to age 90 or 100, but you’re not going to like the price. It goes up exponentially and most people just cancel the policy.
Don’t freak out when you see your illustration if you look down after that 15 or 20-year term that you purchased that the pricing goes way up. It’s not a bait-and-switch from the agent. That’s when your rate lock expires and that means the policy then goes up. And that’s normal in the industry.
That’s how term works. Term is intended to be temporary. It’s not intended that you keep it for the rest of your life. It’s there as a bandaid for a certain period of time to help fill a financial need in case, remember that word, in case something happens.
Hopefully that gives you a pretty good understanding of the difference between the two main types of life insurance. Permanent, cash value can be significantly more expensive, but never going away. That’s for when. Term, temporary, is less expensive, a lot more bang for your buck, no cash value, and it’s there just in case something were to happen to you. I hope that helps.
If you have questions, you know what to do. 🙂