Term vs. Whole Life Insurance Explained
You may be contemplating the purchase of a life insurance policy, but you are confused about the differences between the two major policy types to consider: Term Life Insurance vs. Whole Life Insurance. Read our guide to learn more about the distinctions between the two types of insurance, the benefits of each, and which one might suit you and your lifestyle better. In simple terms, the difference between Whole Life Insurance and Term Life Insurance is how long it provides protection.
Whole Life Insurance policies provide lifelong protection, whereas Term Insurance provides coverage for a given period. Whole Life covers you for as long as you live and continue to make timely premium payments. Whole Life policies have a feature known as "cash value" or "cash surrender value" not found in Term Insurance policies. Whole Life builds cash value, which is a return on a portion of your policy. A rule of thumb to determine which insurance is better is if you intend to keep your life insurance policy for the long term, usually 15 years or longer. If your intentions are long term, then Term Insurance is the better life insurance option for you.
Term vs. Whole Life Insurance Explained
Advantages of Term Insurance:
- It is the most affordable insurance.
- Term Life is the simplest form of coverage to secure.
- It is guaranteed to remain the same for a set amount of years.
- You can purchase additional benefits through riders.
The Disadvantages of Term Insurance:
- Eventually, there will be increasing premiums.
- It requires re-qualification by passing a new medical exam.
- After the end of the policies guaranteed level term period the premiums may become very expensive.
Advantages of Whole Life:
- The policy's cash value can be converted into cash or an annuity. The guaranteed cash values can provide money at a later time and help with temporary needs or emergencies.
- A provision or rider can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.
- With level premiums and the accumulation of cash values, whole life is an excellent choice for long-range goals.
The Disadvantages of Whole Life:
- Required premium levels may make it hard to buy enough protection.
- Premiums are higher than those for term life insurance.
- Coverage may cost more during the early years of coverage when the need for protection is often greatest.
- It costs more to cover needs that will disappear in time, such as mortgages or family income needs for children.
There are several different types of whole life insurance to consider such as:
Whole Life or Ordinary Life Insurance:
- Provides a lifetime guaranteed death benefit, a guaranteed fixed premium, and guaranteed cash values.
- Have the excess earnings of the insurance company credited to your cash value either as dividends or as excess interest?
- Your cash values can be used to pay future premiums, fund retirement and college education, and provide emergency cash reserves.
- Typically provides the best investment rate of return per dollar of premium.
- Perfect for those who want a guaranteed permanent coverage with a guaranteed premium for the rest of their life.
Universal Life or Adjustable Life Insurance:
- A flexible, permanent product that allows policy holders to design their own plan.
- You can adjust your premiums from year to year, increase or decrease your death benefit, and still accumulate savings with tax advantages.
- An ideal policy for first time buyers that are budget minded with young families and changing needs.
- It is often used as a low cost, level premium alternative to Term Insurance when coverage is needed for many years.
- Universal life insurance provides a guaranteed death benefit with a low, level premium.
Survivor Life Insurance (Second-to-Die):
- This plan covers two lives, typically a husband and a wife, or business partners.
- Plans are designed to provide cash to cover estate taxes or business liability, to be paid after both people have died.
- The survivor plan premium is less than if individual coverage was purchased on each life.
- Plans can be based on either whole life or universal life insurance.