Term vs. Whole Life Insurance
One of the tough truths about life is – you can’t predict the future.
If you were to die at a younger age unexpectedly, would you have any funds saved up to pay for your final expenses? What would happen to your dependents’ finances if they were relying on your income?
If you’re looking for peace of mind for you and your loved ones, life insurance could be your answer.
Life insurance provides financial security for your family and pays them funds that they can use to cover your funeral costs, continue making mortgage payments, or for college tuition or other expenses that you’re no longer around to help provide for them. That said, it doesn’t matter if you’re right out of college or about to embark on your retirement: You need life insurance, and there’s no time like the present to get it.
Before deciding on which plan is best for you, it is important to understand why you need life insurance and the disadvantages of not having a policy. In this article we’ll explore the differences between the two main types of life insurance so you can decide which option may be best for you.
What is Term Life Insurance?
Term life insurance provides a payout if you were to die during the window of time or “term” that your policy is active. In other words, you pay your premiums as scheduled and in return your insurer agrees to pay a death benefit should you die within that term.
This type of insurance is just a great way to protect yourself during the years when you are most likely to have major expenses such as a mortgage and kids.
But remember: with term insurance, the policy has no value if you do not die within the term.
You have the opportunity to select the number of years or the “term limit” when you buy the policy (Common terms are 10, 20 or 30 years), and the premium amount you pay and the payout amount, usually stay the same throughout the term. Adding up your living expenses, your home mortgage, pay-off of all debts, and your children’s education can help you understand the face value of a policy your family will need if you die prematurely.
Important things you’ll want to think about when shopping around for a term life insurance policy are:
- How old are you?
- What is your current health status?
- How old are your children (or other dependents)?
- Does the term correspond with the years you’ll be paying big bills and want coverage in case you die early?
- What amount of money would your family need if you were no longer there to provide for them?
- What are your preferred funeral plans and costs?
- Your current debts?
- The age do you plan to retire. Do you have a retirement plan in place?
Here are some of the pros and cons of term life insurance:
Pros | Cons |
Policies are usually convertible to a whole life policy if you meet age requirements | The policy is temporary and has no value unless you die |
Low initial cost | Becomes more expensive as you age |
You are able to match the term length to your specific needs | The term must be renewed if you want coverage to be extended beyond the term length |
Can be used as temporary additional coverage with a permanent life insurance policy |
What is Whole Life Insurance?
Whole life insurance is just how it sounds – it provides coverage for the entirely of your remaining years.
Whole life insurance also includes an investment component known as the policy’s cash value. The cash value grows slowly but is tax-deferred (which means you don’t have to pay taxes on gains while they’re accumulating!). You can even borrow funds against the account or surrender the entire policy for the cash.
Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest, use them to decrease your premium, repay policy loans or buy additional coverage.
Note: if you don’t repay policy loans with interest, you’ll end up reducing your death benefit. If you surrender your policy, you’ll no longer have coverage. Dividends are not guaranteed, so check with your policy provider for further details.
Here are some of the pros and cons of whole life insurance policies:
Pros | Cons |
You get coverage for your whole life | Higher costing premiums |
You may be able to receive dividends depending on the financial performance of the company you chose | You are usually required to complete health exam to qualify for a lower cost. If you buy a plan with no health exam, you’ll usually end up paying more |
You have the option to select a policy with limited payment periods, and premiums are fully paid in a certain number of years | It can take 10-15 years to build up a solid cash value |
Whole life insurance policies build equity over time and you can obtain the cash value through loans and withdrawals | |
Whole life insurance policies are an easy way to be able to pass money onto your next generation (estate planning) |
How Are Life Insurance Costs Determined?
Here is a list of variables that will impact the cost of your life insurance premium:
- Your age
- Younger applicants will have lower premium costs than older applicants.
- Your current health status
- Having any chronic illness, diseases, or a family history of conditions can cause your costs to go up.
- Gender
- Women tend to have lower costing plans than men because their life expectancy is longer.
- The state you live in
- Annual insurance rates vary by state.
- Your occupation
- A person that sits behind a desk will pay lower premiums than someone that has a high-risk job.
Life Insurance Cost Comparison:
We used Quotacy to compare the costs of term and whole life insurance. We reviewed the lowest 3 quotes for males and females between 30 and 50 years of age. Here are the lowest average annual prices of the quotes we reviewed for life insurance:
Person covered | Policy amount | Whole life | 30-year term life | 20-year term life |
---|---|---|---|---|
Male, age 30 | $250,000 | $2,385 | $240 | $156 |
$500,000 | $4,675 | $403 | $242 | |
$1 million | $9,217 | $720 | $415 | |
Female, 30 | $250,000 | $2,114 | $206 | $141 |
$500,000 | $4,142 | $335 | $208 | |
$1 million | $8,150 | $585 | $347 | |
Male, age 40 | $250,000 | $3,508 | $384 | $210 |
$500,000 | $6,910 | $687 | $348 | |
$1 million | $13,700 | $1,281 | $631 | |
Female, 40 | $250,000 | $3,008 | $314 | $185 |
$500,000 | $5,897 | $553 | $306 | |
$1 million | $11,677 | $1,026 | $534 | |
Male, age 50 | $250,000 | $5,436 | $913 | $491 |
$500,000 | $10,802 | $1,725 | $898 | |
$1 million | $21,483 | $3,301 | $1,692 | |
Female, 50 | $250,000 | $4,569 | $689 | $375 |
$500,000 | $9,003 | $1,284 | $669 | |
$1 million | $17,760 | $2,349 | $1,233 |
Should You Choose Term or Life Insurance?
There are many creative and flexible options with life insurance that can meet your unique needs. In 2020, the average life insurance costs between $500 and $1,500 every year, which translates to around $40 to $150 in monthly premiums depending on the type. In the end, you have to decide which policy works best for you. There is no “one-size-fits-all” option for life insurance. Consider what is most important to you at your age and stage of life. Spend some time receiving quotes from insurance companies for both whole life and term life insurance policies.
You’ll most likely want term insurance if:
- You want the most affordable coverage.
- You’d like whole insurance but can’t afford it at the moment (most term insurance can covert to whole life).
- You’re only want life insurance during the “most expensive” time of your life – when you’re paying off a mortgage or have young kids.
You’ll most likely want whole life insurance if:
- You’d want your beneficiaries to get a payout no matter what age you are when you die.
- You have a lifelong dependent, such as a child with special needs.
- You’re wanting to boost your estate plan.
Regardless of which type of policy you choose, you shouldn’t put off buying life insurance any longer. Do not risk letting something happen to you and leaving your family financially stranded.
Kate writes about retirement benefits for retirementinsurance.org. She has a Masters Degree in Social Work (MSW). She has over a decade of experience in assisting elderly and disabled populations navigate governmental and private programs to obtain the monetary assistance they need to lead better lives. As she watched her parents begin their own retirement journeys and navigate similar systems to obtain Social Security, Medicare and other retirement benefits, she gleaned a further personal knowledge about the topic and is eager to share what she has learned with others.