Much like shopping for car insurance, getting started with life insurance involves comparing products and pricing, as well as deciding how much insurance you need. While vehicle coverage is fairly straightforward to understand, life insurance can be confusing. Two of the most common types of life insurance are term life vs. whole life. Both term life and whole life provide a death benefit for the beneficiaries you choose, but whole life is a type of permanent policy with a savings component, while term life is only in force for the period of time that you choose.
What is the difference between term and whole life insurance?
There are two significant differences between term vs. whole life insurance: length that the policy is in effect and the cash value benefit. Term has a set limit of time for coverage while whole life insurance is known as permanent life insurance and is in effect for as long as you pay your premiums.
The premiums you pay for term life insurance go towards the death benefit you intend on leaving. With whole life insurance, the premiums you pay go partly towards the death benefit — and partly towards a savings account component you can access while you are alive. Take a closer look at the features of each kind of policy.
Whole Life Insurance
Whole life insurance is often referred to as permanent insurance because it is designed to cover you from the time you purchase a policy, until you pass away. Whole life is a traditional form of life insurance that features a fixed premium rate and pays a fixed death benefit. However, whole life insurance also features a cash value savings vehicle.
- Cash value: Part of your premiums are set aside in a savings account, known as cash value. This portion of the policy is for your use.
- Value to beneficiary – When the insured passes away, the beneficiary receives the entire face value, less any outstanding loan taken from the cash value. The age of the insured does not matter and will not affect the death benefit amount.
- Payment schedules – Most insurers give the option to pay monthly, quarterly, semi-annually or annually. The policy covers you as long as you continue to pay the premium.
- Investment potential – The cash value acts like a savings account and may pay dividends, depending on the policy terms. You can borrow from the cash value or decide to cash out the policy if you no longer need the coverage.
- Prequalification – Depending on the policy, you may be expected to answer health questions about your medical history and you may be required to take a medical exam. Whole life insurance is generally more expensive vs term life because the policy covers you for as long as you live.
|Cash value||Borrow from or draw on the growing amount||Must be paid back or will be deducted from the death benefit|
|Payment schedule||Monthly, quarterly, semi-annual, annual||May be subject to additional fees for breaking up the payment throughout the year|
|Value to beneficiary||Face value paid to beneficiary regardless of age (if over 18)||Any outstanding loan against the cash value could reduce the death benefit amount|
|Investment potential||Builds cash value and dividends||More expensive policy and dividends may not be guaranteed|
|Prequalifications||May not require a medical exam||Coverage could be too expensive depending on medical history|
Term Life Insurance
Term life insurance can be purchased for a set period of time. When comparing term vs whole life insurance, term coverage is generally less expensive. Consider the following factors that affect term life insurance.
- Terms and Medical Requirements – Term life insurance often pays a set face value and covers you for a specific period, typically ranging between five and 40 years. The 20-year term policy is the most popular, according to the Insurance Information Institute. You will have to answer health questions and may be required to take a medical exam. Some policies feature a renewable option which allows you to renew the policy for another term, oftentimes without taking another medical exam, but the rate will be based on your current age.
- Age Limits – Many term life policies have an age limit, usually around 80. So, if you want to renew a 20-year policy at age 65, the insurer might only offer you a 15-year term to continue coverage.
- Premiums – Term life insurance companies base your premium on your health at the time of application or renewal, your age and your life expectancy. Term life insurance is much more affordable for people at a younger age and in good health than whole life. However, a common characteristic of term policies is increasing premiums as you age.
- Decreasing Term Policies – A term life policy can have a level or decreasing term. A decreasing term policy decreases the death benefit over the life of the term, usually at a monthly or yearly rate. Many people choose a decreasing term policy to provide coverage for a mortgage.
- Convertible and return-of-premium Term Policies – Some term life policies are convertible, allowing you to convert them to a permanent policy after a certain period, oftentimes without taking another medical exam. A policy with a return-of-premium feature pays back a portion of the money you paid after the term ends, but this privilege comes with much higher premiums.
|Terms and medical requirements||Terms ranging from five to 40 years, usually involve medical questions but possibly able to skip medical exam||Optional renewable term feature can be expensive, health history may require a medical exam|
|Age limits||Depends on company — usually cannot purchase after age 80||Seniors may not qualify for term and renewable options may be limited|
|Premiums||Much cheaper than whole life for same death benefit||Health concerns could lead to higher premiums|
|Decreasing term policies||Provides coverage for a mortgage||Premiums similar to term with decreasing death benefit|
|Convertible and return-of-premium term policies||Able to convert term to whole life or get a portion of premium returned after term expires||Whole life is more expensive and uses current age when converting, return-of-premium is provided at higher costs|
Term vs whole life insurance
Whole life and term life policies have one major thing in common, they both pay a death benefit. If you have a $100,000 term life policy and die during the term, your beneficiary will receive $100,000.
Likewise, if you purchase a $100,000 whole life policy and continue to pay the premium until you die, that policy will pay $100,000.
|Why choose term life insurance||Why choose whole life insurance|
|Lower cost for term vs whole life||Cash value and potential for dividends|
|Good health history could waive medical exam||Eligible to take a loan against the cash value|
|Young applicants get best rates, as long as they are healthy||Young applicants get the best rates|
|Flexible choice of terms||May qualify for no medical exam|
|Easy to understand||Life-long coverage|
Whole and term life policies also approach an applicant’s age in a similar way. With both types of life insurance, you will pay a lower premium if you purchase a policy while you are relatively young. If you wait until you are in your 60s, you will pay a much higher rate or may not qualify due to a medical condition.
When comparing term vs whole life insurance, the two types of policies have a few significant differences. Term life only covers you for the length of the term, while whole life continues to cover you until the end of life. Most term life policies require a medical questionnaire or passing a medical exam to qualify, while whole life policies usually do not require an exam for people under 50.
If you purchase a whole life policy at a young age, the process will likely only involve signing documents. But the term life process is usually much more involved.
To prequalify, you must answer a long list of questions about your health history, current health and your family’s health history. The insurer will also ask about your lifestyle, questions such as whether you use tobacco products or enjoy dangerous activities such as rock climbing.
If you prequalify, you might also need to pass the medical exam. The insurer will base the policy’s premium on your answers on the prequalification questionnaire and the result of the medical examination.
The savings account feature of a whole life policy sets it apart from term life coverage. Although some term life policies include a return-of-premium feature, most do not.
Which is better: Term or whole life insurance?
Choosing between term life vs whole life will depend on your goals and needs. If you just need protection for a certain number of years, a term life policy is all you will need.
Planning for your future
For example, if you expect your kids to leave the nest in about 15 years, you could buy a 15-year term life policy. Or, if you just purchased a new home, with a 30-year fixed mortgage, you might buy a 30-year decreasing term policy that could pay off the house if you pass away before your spouse.
If you need a term life policy as income replacement to protect your family’s assets after you are gone, multiply your current pre-tax salary by the number of years your family will need to rely on the death benefit. For instance, if you make $50,000 per year, and think your surviving spouse can recover financially 10 years after your passing, purchase a $500,000 policy.
If you are looking for a policy that will earn money, whole life insurance is the way to go. The savings account of a whole life policy will pay dividends, but only an amount determined by the insurer. A couple of modern variations of the whole life policy can enable you to make even more money.
Universal life policies work like whole life policies, but funds deposited into their savings account earn money based on a money market interest rate. After your universal life policy matures, you can also alter the premium payments.
Variable life insurance policies provide permanent coverage, while offering even more flexibility by enabling you to invest the savings portion of your policy in bonds, money market mutual funds or stocks. However, variable life policies can pose a greater risk because you could decrease your savings and death benefit if your investment underperforms.
You can also choose different types of life insurance policies at various stages of your life. You can get a great premium rate on a permanent life policy if you purchase one while you are a young adult. If you choose a flexible policy, like variable life, and invest well, you could see significant earnings by the time you retire.
And, you can use term life policies for added protection during critical periods of your life. For instance, if you just sent your daughter off to college, you could buy a 5-year term policy to cover the cost of her education in case you pass away before she graduates.
Frequently asked questions
What is a death benefit?
The death benefit is the amount paid out to your named beneficiary after you die. It is the only part of a term life insurance policy, unless you purchase riders or additional features. Whole life insurance has a death benefit and a cash value.
What is cash value?
A whole life policy’s portion of the premiums you pay goes towards the cash value. It is an amount that grows in value as you contribute. You can make withdrawals or borrow from the balance.
Is whole or term life insurance more expensive?
Whole life has much higher premiums than term life. However, many factors determine the cost of life insurance, including your age, health and life expectancy. Regardless of whether you choose term or whole life coverage, rates will be lower if coverage is purchased when you are younger.
What happens if I outlive my term life insurance?
Term life coverage expires when the term ends. If your policy terminates, you will not receive any money back, unless your coverage includes a return-of-premium feature. However, if you purchase a renewable term policy, you may have an opportunity to continue coverage at the end of the term, although the premium will be adjusted based on your advanced age, and you generally will not be able to renew past a certain age, so you could end up with no coverage in old age.
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