When you first start researching coverage, Term vs Whole life insurance is often the initial search. When considering life insurance, you will likely be faced with your first major choice: do you want term life insurance or whole life insurance?
For the vast majority of people, the answer is term. Why? We’ll get into that, but before we do it’s time to learn a bit about both forms of insurance, their differences, and their similarities.
>>More: Learn about the best life insurance companies in the USA for term and whole life insurance.
Comparing Term vs Whole Life Insurance
The major difference between whole life insurance and term is the length of coverage it provides.
Ask yourself: Will you outlive your coverage?
Life insurance policies are designed so that when the insured passes away, the company pays a benefit to the beneficiary named in the contract. When purchasing a term plan, you’ll be able to choose your length of coverage (from 1 year to 30 years) and if you pass away within that designated term, a benefit will be paid.
On the flip side of the coin, whole life insurance provides protection for your entire life and adds an investment aspect. These investments are issued as dividends and are based on the profitability of the life insurance company and their investment portfolio. If you need to borrow money in the future, you can take it from your policy earnings.
Term Life vs Whole Life
Should you purchase term life insurance or whole life insurance? That decision is based on two things – your financial goals and your beneficiaries’ needs. The great thing about life insurance is that it’s extremely flexible and powerful tool for meeting any number of your financial goals. It can provide financial security and help to establish financial assets. It can also help to leave your legacy behind.
Related Article: Types of Life Insurance
Term Life Insurance Overview
With a term life insurance policy, you pay a certain amount for a set period of time. During this time, the insurer will pay your beneficiaries the stated amount should you die during the coverage timeframe.
What we like about Term Life
Term Life Pros
- Reasonably Priced – You can buy a term life insurance policy in high amounts for a smaller premium amount compared to permanent life insurance policies.
- Needs and Terms Are Equal – The majority of people choose to match their mortgage loan terms and amount to their life insurance’s term and coverage. Your mortgage will be paid off with the life insurance money, giving your loved ones some protection in the event of your death.
What we don’t like about Term Life
Term Life Cons
- Temporary Policy – If your term life insurance expires and you still need life insurance, you’re older and likely not as healthy. This often equates to higher premiums to get the coverage you need.
- Unpaid Benefits – If you live beyond the term of your life insurance policy, your beneficiaries won’t get the benefit. However, there are many life insurance companies like Mutual of Omaha that have a Return of Premium Term life insurance. This means the money you paid into the company is given back to you if you live beyond the terms. If you die during the term, the beneficiaries will get the death benefit. You can also add a return of premium rider to some term life policies.
Whole Life Insurance Overview
This life insurance option is a death benefit that lasts your entire life. It has cash value that will increase in value, letting you borrow money or withdraw the funds when needed.
What we like about Whole Life
Whole Life Pros
- Lifetime Coverage – With a whole life policy, you get coverage that lasts your entire life – not a specific timeframe. If the policy is active when you die, your beneficiaries will be given the stated death benefit.
- Access To Money – Some of the premium you paid on the policy becomes part of its cash value. After you’ve built up a specific cash value amount, you can ask for a loan or have a line of credit extended to you. When applying for a line of credit, you can claim that cash value as an asset. Think of it as one more financial security for your household.
- Estate Planning – If you’ll have a lot of assets to pass on or assets worth a lot of money, talk with your estate planner or attorney about the policy so that the money pays for estate taxes your heirs would have to contend with upon your death.
- Attain Dividends – The company may pay dividends to you, but if that happens will depend on its own financial performance. While dividends are not promised, the prospect of them makes it a lucrative options.
What we don't like about Whole Life
Whole Life Cons
- Higher Starting Premiums – During the first few years of this kind of policy, you will have a higher monthly premium than you would with a term life policy. However, the premiums become more affordable as the policy ages. Term renewals will cost you more money after your initial policy expires.
- Confusing – Permanent life insurance products can be a little confusing when it comes to cash value, policy loans and policy withdrawals.
Related Article: Difference between term whole and universal life insurance
5 Reasons To Consider Changing Your Term Life Into A Whole Life Insurance Policy
The majority of term life insurance policies provide the option of converting the policy into a permanent life insurance policy like a whole life insurance. Is this something for you to consider?
Here’s what to think about if you’re considering the option:
- Age: You’re in your 50s and 60s with a policy that’s about to expire.
- Extension: You need to extend the coverage, but the term insurance isn’t available any longer or is extremely expensive because you’re now older.
- Estate: You have an estate that you’re concerned about.
- Trust: You want to set up a trust in your will.
- Taxes: You want to have a non-taxable investment option.
If you convert your term life insurance into whole life insurance, you can extend the life insurance policy that allows you to build a borrowable cash value. There are many ways in which to have this kind of policy – it’s all based on your goals and needs.
Make sure you talk with an independent life insurance professional – a person who can answer your questions and steer you in the right direction.
3 Reasons to Replace Whole Insurance Life with Term
Here are 3 common situations that Whole Life insurance policy owners should think about before replacing their permanent policy with Term coverage.
- Your Needs are Temporary: Your needs may have changed and perhaps you don’t require lifetime coverage. You may only need temporary coverage and Term now it makes sense to use term vs whole life.
- Increased Death Benefit: Depending on your age and other factors, a term life insurance policy will probably provide you a much higher death benefit amount for the premium cost.
- Invest the Difference: A major strategy for using Whole Life insurance is to use it as a savings vehicle. Many suggest saving money by buying term and investing the difference.
What Are Some Considerations To Remember About Whole Life and Term Life Insurance Policies
Should you get a whole life insurance policy or a term life insurance policy? There are a copious amount of variables to take into consideration when making that decision. Before you decide on anything, it’s important to talk with an experienced life insurance agent who can review your life circumstances and help you to decide which option is better for you.
What are some factors to bear in mind?
- Present age
- Present health state
- Family financial needs
- Funeral plans
- Children’s ages
- Long-term health expenses in case of major illness
- Present debts, mortgage, etc.
- Retirement plans
- Future family needs
- Retirement savings plans
- Plans for estate; dealing with taxes
- Setting up a trust
- Donation of life insurance to charity
- Feelings about paying money on term policy that’s never used
Example Scenarios for Term v Whole Life
Let’s look at a hypothetical scenario:
You are 45 years old with three young kids and the main breadwinner in your home. Your best bet would be a cheap term life insurance policy that covers the financial obligations of your family – mortgage, car payments, children’s present and future education, etc.
The term length would depend on your children’s age and when you think they’ll be done with college.
You could also buy a whole life policy that pays the policy at face value if you die before your children finish college. However, it will also accrue a cash value that offers additional protections to your family or gives you money when you need it. You could convert some of the term life policy into a whole life insurance, so you have a cash portfolio when you’re ready to retire.
If you’re 65, chances are your kids are all grown. Thus, your needs are not going to be the same as when you were 40. You may want to look at a smaller term life insurance policy – something that covers the final expenses. Or, you could look for a whole or term life insurance policy that covers your spouse’s needs after your death.
There is a host of flexible life insurance options for you to choose from. However, it’s best to speak with an experienced, knowledgeable life insurance professional to determine if term life or whole life is best for your particular set of circumstances.
Cost Comparisons Of Term Life vs. Whole Life
By now, you should have a better idea what term and whole life policies are, but what about their costs?
When it comes to costs, several factors affect the price of your short and long-term term or whole life policies.
3 Major Factors include:
- Policy Face Value
The cost for a whole life insurance policy will be more than a term life insurance. Why is that?
The money you pay into the term life insurance is only available to your beneficiaries upon your death if you die during the term length. The money in the whole life builds cash value that can be used later if you need it. Most of the administrative costs and investments that occur with the Whole Life policy are addressed early on.
The High Cost of Whole Life Insurance
There is a reason whole life insurance policies are more expensive than their counterparts: you’re paying for both the insurance portion and the investment component.
You may be thinking that you need a good outlet for your investments, anyway, so why not do it through your life insurance plan?
Well, as it happens, these really don’t provide you with the best investment bang for your buck.
Not only are there better ways to save for the future than being forced to by your insurance company, you can avoid the high commissions by using more traditional investment funds. Of course it will all depend on your specific goals and circumstances.
Whole Life Cash Value
Any meeting between an applicant and an insurance salesman is bound to be filled with the words “cash value”. It’s important to understand, however, that a whole life insurance policy doesn’t really have any cash value beyond the face value of the policy itself.
Certainly, given enough time, it will build that value. But when combined with the high premiums involved with the policies, you’re doing little more than paying your own face value and self-insuring your investments.
In rare cases (you live to 100 and your investments mature), you may get more than what you’ve been guaranteed, but this a possibility too remote to take seriously.
Die before that time and your beneficiaries will receive the face value only, just as they would with a term life insurance plan. The only difference being that you paid much less for the term policy.
Term Life Insurance Premiums
On the other side of the coin, term life insurance premiums are often very affordable, particularly for those in good health and those under the age of 50.
Once you get within shouting distance of retirement age, of course, those premiums will start to rise dramatically. But this applies to whole life insurance as well, giving it no advantage in the competition between the two.
That said, if you’ve waited until your elder years to buy life insurance, you may have no choice but to buy a whole life policy. Many companies are hesitant to sell term policies to applicants over the age of 75.
Is Whole Life Ever the Right Choice?
Of course, if the answer was “you should always choose term life”, life insurance companies probably wouldn’t bother selling whole life policies. The truth is that there are times where whole life insurance makes sense.
If you have considerable wealth, you can leverage whole life investments into your overall estate planning strategy, setting up a trust that will use policy benefits to pay off estate taxes. Likewise, if you are starting a family later in life, whole life insurance might be worth looking into.
The problem with whole life insurance plans – even when they might be worth considering – is that it takes a financial expert to examine a policy and determine whether or not it might be a good investment. Most insurance experts agree that a whole life policy is unlikely to yield a decent ROI unless it’s held on to for at least 20 years. It’s not just insurance experts — financial celebrities like Suze Orman and Dave Ramsey say it too.
If you do choose to buy a whole life plan, in other words, you may want to think about holding on to it for a while. If, however, you want affordable premiums and good coverage and you’re not interested in using your life insurance policy as a retirement plan, term life is the way to go.
Would It Be Wise To Have Both Term and Whole Life Insurance Policies?
If you decide to have both a whole life and term life insurance policy at the same time, you can do this. Most people considering this have a whole life policy in place. They may find that they need or want a little more coverage – something short-term. With that in mind, they can get a term policy for a specific amount for a certain period of time.
If you have a term policy and you want to invest it into something long-term such as paying off a mortgage or dealing with estate taxes, you can get a whole life insurance policy that offers a cash value feature.
Remember, a term life insurance policy is going to be less expensive than a whole life insurance policy.
A Guaranteed Universal Life insurance policy, however, could cost around $3,200 a year for men and $2,700 for women with costs going even higher for a whole life insurance policy.
The amount of coverage you need to buy is going to be dependent on many mitigating factors – family support, financial obligations, etc. Make sure to choose a policy that best meets your needs and goals.
Compare Quotes for Whole vs Term Life
Before you settle on any insurance company, do your research. Compare different rates and quotes and see what they have to offer. If necessary (and you should), talk with a professional financial advisor about your options on term or whole life insurance.
At Life Insurance Blog, we work with over 60 of the top rated life insurance companies. We’ll provide you impartial rate comparisons for term life insurance vs. whole life insurance. Get rates from both policies and compare them side by side. Life Insurance Blog agents are independent so we don’t push specific carriers like some agents. We simply provide you all your options, answer all your questions and help you through the entire process.
We look forward to helping you. Give us a call if you’d like to speak with us directly. You can also run instant quotes directly on this page with our life insurance quoter.
Thank you for reading our post, Term vs Whole Life Insurance. To learn more about life insurance, make sure to visit our page Life Insurance 101 or find out how much you may end up paying for coverage on our Life Insurance Rates by Age page.