You’ve decided you need life insurance. Great. Now you need to decide which type of life insurance you need. Life insurance policies aren’t all the same. There’s actually a wide range of coverage types, and they each come with their own advantages and disadvantages. So what’s the right life insurance policy for you? Here’s what you need to know about the difference between term insurance and whole life insurance.
Term vs. Whole Life Insurance
Term life insurance is designed to last for a predetermined period of time. The term lengths vary considerably, but they are often for five, 10, 20 or 30 years. If the insured dies during this coverage period, the death benefit is paid to the beneficiary, barring any coverage exclusions.
When the term ends, the policy expires. This means that the policyholder no longer needs to make premium payments. It also means that there will be no death benefit if the insured dies. If the policyholder is fine with this, no action is needed. However, the policyholder may want coverage to continue. In this case, the policyholder may be able to renew the policy, purchase a new life policy or convert the term life insurance policy into a permanent life insurance policy.
Whole life insurance is a type of permanent life insurance. Like term life insurance, whole life insurance pays a death benefit if the insured dies. However, unlike term life insurance, whole life insurance and other permanent life insurance policies do not have a set expiration date. They can remain active for the insured’s entire life, assuming the policyholder keeps up with the premium payments.
Whole life insurance policies also have a savings aspect to them. These policies can accrue a cash value, and policyholders can access this cash value during their lifetimes.
Universal life insurance is another common type of permanent life insurance. Like whole life insurance, universal life insurance does not expire, and it accrues a cash value. However, while whole life insurance has a fixed premium and death benefit amount, universal life insurance is more flexible.
When considering your life insurance options, it’s important to look at both the pros and cons.
Term Life Insurance: Pros and Cons
Term life insurance has several advantages. First of all, it tends to be relatively affordable. Premiums will vary based on a number of criteria, including the applicant’s various risk factors, such as age, health, medical history and activities. The length of the term and the benefit amount will also impact the premium. However, for applicants who are relatively young and healthy, it’s often possible to get a death benefit of $250,000 or even $500,000 for under $20 per month.
Term life insurance is also fairly straightforward. For people who just want some financial protection to ensure that their loved ones will be taken care of, term life insurance provides a simple solution and peace of mind.
However, there are also disadvantages. Term life insurance does not build a cash value. If the insured outlives the insurance policy, the premiums are not returned, and the policyholder no longer has benefits. Of course, this is how insurance often works, whether we’re talking about life insurance, homeowners insurance or auto insurance. You pay for coverage in case there’s a claim, but you hope you never actually have a claim.
An important exception to this is term life insurance policies with a return-of-premium benefit. If the insured outlives the policy, return-of-premium life insurance does return the premiums. However, the drawback is that these policies can be much more expensive than regular term life insurance.
Permanent Life Insurance: Pros and Cons
One big advantage to permanent life insurance is that it never expires. This means that as long as you keep up with your payments, you never have to worry about being without coverage and being unable to qualify for a new policy.
Many people are also attracted to the investment aspect of permanent life insurance policies. A permanent life insurance policy builds a cash value over time. Policyholders can withdraw or borrow funds from whole and universal life insurance policies; something that isn’t possible with term life insurance. Whole life insurance policyholders may also receive annual dividends. If the owner of a permanent life policy no longer wants the policy, it is possible to surrender the policy for a cash amount or to sell it.
Riders offer another way to access a life policy’s value during the policyholder’s lifetime. Accelerated death benefit riders and long-term care riders allow policyholders to claim a benefit if they are diagnosed with a terminal illness or need nursing home care.
However, there are also downsides to permanent life policies. These policies can be more complicated, especially when various riders are involved. It’s important to understand how these riders work and what the requirements and exclusions are. Policyholders who borrow money from their policy also need to be careful. Interest may be charged on the loan, and the death benefit may be impacted.
Permanent life insurance also tends to be much more expensive than term coverage. Someone who might be able to get a term life insurance for around $20 a month or less might pay $250 or more per month for a whole life insurance policy.
Deciding Between a Term or Whole Life Insurance Policy
Both term and whole life insurance come with advantages and disadvantages. It’s not a matter of which one is better. It’s a matter of which one is better suited for your specific needs.
- Do you need affordable coverage to protect your loved ones while you have a mortgage to pay off, minor children to provide for, or other financial responsibilities? Do you want an inexpensive plan to cover funeral expenses? A term life policy might provide the financial protection you need.
- Do you want coverage that will last your entire lifetime and that offers benefits during your lifetime? You should consider whole life insurance or another type of permanent life insurance.
Another thing to keep in mind is that it’s not always a matter of one or the other. You can buy term life insurance with the intention of converting it to a permanent life policy later. If this is your plan, look for term insurance that will let you convert your policy without the need for a medical exam. Also make sure you know when you have to convert the policy so you don’t miss out on this window.
It’s also possible to own multiple insurance policies. Many different combinations of life insurance coverage are possible. For example, you might have a group term life insurance policy through work, but you may also want to purchase a whole life policy. Alternatively, you might decide you want to have your group term life policy plus another term life policy that provides a larger death benefit and is portable in case you change jobs. You can also stack term life insurance policies if you need more coverage. For example, you might take out a term life insurance policy when you buy a house. Then you have a child and decide you need more coverage, so you take out another policy.
When it comes to life insurance, you have many coverage options. If you need help understanding the difference between term and whole life insurance and which one meets your coverage needs, Higginbotham can help. Learn more.