Term vs. Whole Life Insurance

Term and Whole Life Insurance are the oldest and the most popular types of life insurance. The two might be Life Insurances but contrast each other in different ways. Both of them have varying features and purposes. While Term Life Insurance lasts for a number of years, Whole life as the name suggests lasts for the whole life of the assured. To know more about these two types of life cover, do read on.

 

What Is Term Life Insurance?

Term Life Insurance is a type of “pure life insurance” that provides life coverage for a specified period. Pure life insurances offer protection to dependents of the assured in the event of the sudden death of the assured. For instance, if a Term Life policyholder dies within the term of the policy, his or her beneficiaries receive the benefit (compensation), period! After the death benefit is paid the policy expires.

When buying the policy, the proposed assured has the liberty to choose the term of the policy – terms include 10, 20, and 30 years. Term Life Insurance is simple, straightforward, and easier to understand. The singular purpose it serves is the payment of death benefits to one’s beneficiary in case of death while the policy is in force.

Benefits

Term Life Insurance is a cheap kind of life insurance because of the fact that it’s simple and has a duration. For individuals looking for a policy that protects their dependents when they die, the best bet is Term Life Insurance. If you seek to protect your kid’s future say till he finishes college or joins the workforce full time, then you should go for a term that is long enough for that purpose. 

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It’s important to note that the premium payable varies from one assured to another based on varieties of factors. For instance, the insured looking for a larger death benefit or longer term of coverage will have to pay more premium. Furthermore, since health complications cause the premium rate to go up above standard hence, the assured is required to go for a medical exam.

Pros

  • Term Insurance is less expensive when compared to other types of life insurances.
  • Term life is a simple and straightforward policy to understand when compared to “permanent” policies.

Cons

  • Protection is only available for the term of the policy and no further.
  • Term life cannot be used as a wealth-building or tax-planning strategy.
Life Insurance Conceptual Image

What Is Whole Life Insurance?

Whole Life Insurance is a type of permanent life insurance that offers lifelong coverage to the assured and includes an investment component known as the policy’s cash value. The cash value grows gradually in a tax-deferred account (i.e., its gains are not taxed as it accumulates). Unlike Term Life Insurance, Whole Life Insurance never expires provided the assured keeps paying the premium. Also, Whole Life Insurance comes with death benefits like Term life but in addition to that, it provides cash value. These two attributes of Whole Life Insurance differentiate it from Term Life Insurance.

Furthermore, the assured can take a loan against the Whole Life account or surrender the policy for cash. If he or she didn’t pay back what was borrowed against the account with interest, the death benefit payable is reduced. On the other hand, if he or she surrendered the policy, it means the policy is terminated (there is no longer coverage). 

Whole Life Insurance is more complicated than Term Life Insurance but more straightforward than any other permanent life insurance. Here are some interesting features of Whole Life Insurance that make it a more straightforward permanent life insurance. It’s a simple form of permanent life insurance because the premium payable on it remains the same as long as the assured lives. Also, the death benefit on it is guaranteed and the cash value accounts on the policy grow at a guaranteed rate.

In practice, certain Whole Life policies earn annual dividends i.e., it pays back a bit of the insurance company’s profit to the assured. The assured can either take the dividend in cash, leave them in his or her account to earn interest or use them to decrease the payable premium, buy an additional cover or repay loans against the policy. Note that the dividends are not guaranteed.

Benefits

The payable premium on Whole Life Insurances is “level premium” i.e., they are the same rate as long as the policy. The premiums are usually split into two, one part goes to the insurance component while the other is used to build the cash value. Many insurers offer a guaranteed interest rate like 1% to 2% annually. As said earlier, some insurers offer “participating” policies that pay unguaranteed dividends which can increase your total returns.

At the onset, the amount of the Whole Life premium is higher than the cost of the insurance but as one gets older, the reverse becomes the case. In fact, the cost becomes even lower than the cost of a Term Policy. Also, as time goes by, one can take a loan from your account or withdraw the tax-deferred cash value amount to settle bills or do anything one wishes. Hence, a Whole Life policy is more flexible than a Term Life policy.

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One issue with the Whole life policy is its complexity especially when you wish to walk away from the policy. Unlike a Term Life policy that you can discontinue anytime, for Whole Life policy you will be mandated to pay a surrender charge of up to 10% of the cash value if you wish to walk away from it. 

The death benefit and cash value on a Whole Life policy are not completely separated, hence if you borrow from your policy, your death benefit will reduce if you refuse to pay back the loan.

Pros

  • Whole life insurance is flexible and helps to mitigate hardship with the capability of allowing you to take a loan against the policy for future financial needs.
  • Death benefits and Loans on Whole Life policies are generally tax-free.
  • On Whole Life policy, you can lock in your premiums for life.

Cons

  • Whole life insurance is usually more expensive when compared to Term Life Insurance.
  • Whole Life Insurance charges you surrender charges when you lapse the policy within the first few years.
  • If you take a loan against your policy and refuse to pay it back, it reduces your death benefit.

Head-To-Head: Term Life Insurance vs. Whole Life Insurance

Policy Features Term Life Insurance Whole Life Insurance
Availability of accumulating cash value  No Yes 
Availability of lifelong coverage  No Yes
Choice of policy length  Yes No
Consistency of Premium (i.e., does premium stay the same?)  Yes Yes
Eligibility for annual dividends  No Yes
Guaranteed Life insurance payout amount Yes Yes
Low payable premium  Yes No

Term vs. Whole Life: Cost comparison

As earlier said at the beginning of this post, Term Life Insurance is relatively cheap compared to Whole Life Insurance. One of the reasons is that Term Life Insurance is a temporary cover and does not come with cash value. 

On the other hand, Whole Life Insurance is more expensive because it covers you for a lifetime, it comes with cash value with a guaranteed rate of investment return on the amount in your account.

Using available data from Quotacy, here you can see the annual price payable on both policies for a $500,000 policy using 20 years term.

Assured 20-year Term Life Insurance Whole Life Insurance
Male, age 30 $228 $4,015
Female, 30 $193 $3,558
Male, age 40 $341 $6,042
Female, 40 $289 $5,413
Male, age 50 $842 $9,432
Female, 50 $654 $8,440
Annual premiums using an average of three lowest prices available in each category for healthy men and women. Source: Quotacy.

Term vs. Whole Life Insurance: Which to choose

When trying to choose a cover, the saying goes that a basic cover is better than no cover at all. Hence, Term life cover is sufficient for most families, however whole life cover can be useful in certain situations. Read on to discover which to choose between the two.

When To Choose Term Life Insurance

If it so happens that you require life insurance as a substitute for your income over a certain period, e.g., years you are raising children or have aged parents that depend on you or paying off your mortgage, in this case, the most appropriate insurance to choose is Term Life Insurance.

If you want to cut costs for the time being and require the most affordable coverage, then choose Term Life Insurance.

When affordability is an issue but you want permanent life insurance then get a Term Life Policy because most Term Life policies are convertible. You can convert them to permanent cover later when you can afford to.

When you are planning your financial portfolio in order not to have all your eggs in one basket, buying Term Life Policy is the way to go. Instead of spending all your money to pay for insurance, you can a cheaper Term Life Insurance and put the remaining fund into other forms of investment vehicles.

When To Choose Whole Life Insurance

Whole Life Insurance is very useful because of its lifelong feature, hence families that have lifetime dependent like a child with disabilities. Furthermore, after you are gone, Whole Life Insurance can be used to fund a trust to cater for that child.

Families that want to spend their retirement savings and still leave an inheritance or money for final expenses like funeral costs.

If you wish to equalize your inheritances, Whole Life Insurance is the best bet. For instance, if you want to leave a property or a business for one child, you can use Whole Life Insurance to compensate your other children.

Conclusion

Now you know that Whole Life Insurance is more flexible in terms of finance compared to Term Life Insurance. It also comes with a cash value component in addition to the death benefit. However, Term Life insurance is less expensive and less complex compared to Whole Life. Hence, whichever you choose ensures it fits your need, purpose, and financial muscle.

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