Buying life insurance can be tricky. You may have gone back and forth for years, debating whether you even needed coverage, before deciding to buy a policy. Then, you spend hours crunching numbers, planning for the future, and talking to your spouse in order to decide how much coverage to buy. Of course, there’s one more big question: do you need term or whole life insurance?
Comparing the two types of life insurance is important, too. The benefits they provide are very different, and you can wind up wasting money if you purchase the wrong one. For instance, term life is much simpler to buy, understand, and even change your policy as your needs change over time. Whole life insurance is more expensive and is a much more serious commitment, but can provide you and your family with additional benefits.
Let’s take a look at the difference between term and whole life policies, so you can decide which one is right for you and your family.
Term Life Insurance
There are a few characteristics of term life policies that make them an excellent choice for many.
You pick your timeframe
With term coverage, you’ll pick the amount of time that you want to hold the policy for, called the “term.” The most typical terms for life insurance are 10, 20, or 30 years. You can find policies for shorter or longer lengths of time (up to 35 years), though they are much less common.
This is beneficial because you aren’t locked into a specific policy for the rest of your life. You can choose a term that coincides with your needs at the moment, and in the foreseeable future. Then, you can revisit your family’s needs, adjusting your coverage as necessary.
It’s more affordable
The reason that many Americans choose term life insurance policies is that they are typically less expensive than their whole life counterparts. If you’re young and in generally good health, you can get a term life insurance policy for a fraction of the cost of a whole life policy with the same level of coverage.
This affordability makes it easy to buy a policy at an earlier point, rather than struggling to find room in your budget for much-needed coverage.
You can bypass a health exam
With many term life insurance policies, consumers can get away with avoiding the often-required health exam. This exam can draw out the process of buying an insurance policy and is generally thought of as an inconvenience. For many considering a policy, the idea of an exam can also be daunting because they fear that their quoted rates will actually go up afterward.
In fact, the LIMRA 2017 Insurance Barometer Study found that 70% of respondents would choose a term insurance policy that didn’t require a health exam over one that did.
It can often be converted to whole life
Another great feature of the term life policy is that it can often be converted to a whole life policy down the line. If life, or your family’s needs, change after purchasing your term policy, many companies will allow you to convert to a whole life policy while retaining some of the value of your existing coverage.
This feature is especially beneficial to have if health conditions arise for you or your family members. For instance, if one of your dependents is disabled and will need lifelong care or financial assistance, a whole life policy will suddenly make more sense. By converting your policy, you will lock in exactly what you need to provide for your family, for the rest of your life.
The negatives of term life
Of course, term life policies aren’t perfect by any means. There are a few downsides to choosing this type of coverage.
For instance, term life policies will go up in price as you get older, or if you encounter health concerns. Once you reach age 50, premiums will jump substantially. As you renew your policy following the end of each term, you can expect the cost to adjust (in the upward direction). However, whole life policies are locked in for life.
Another downside is that term life insurance will only provide death benefits, and only during the time period in which your policy is valid and up-to-date. Whole life, by contrast, offers a number of additional features – like an accumulated cash value – which can even be used prior to your death.
If you don’t pass away during your life insurance policy’s valid term, that’s great news. Unfortunately, though, it also means that all of the money you invested into premiums is simply lost. The policy is temporary and holds no cash value, which is the reason it’s so much cheaper by comparison.
This isn’t unlike other types of insurance, of course – the same happens with your homeowners, renters, or auto insurance policies – but it can be discouraging to see how much you paid in premiums, without anything to show for it.
Whole Life Insurance
If you’re looking for a longer-lasting life insurance option that offers additional benefits, even before your death, you might want to consider a whole (or permanent) life insurance policy. There’s a reason why two-thirds of consumers choose whole life over term life, after all.
It builds a cash value
One of the best aspects of a whole life policy is that your premiums aren’t simply lost. The money that you pay each month for coverage actually goes to work for you, accumulating a cash value that will build interest and provide you with a strong asset over time.
Many consumers use whole life insurance policies as retirement vehicles, considering the cash value of the account to play a notable part in their estate planning.
The amount can even be borrowed against over time, and withdrawals are tax-free up to the amount that you’ve paid in premiums. While this is a tricky game (if you were to pass away after withdrawing from the account, your beneficiaries would receive less money), it can be a great buffer when financial situations arise.
You’re covered for life
The permanent aspect of a whole life policy is one of its biggest selling points. With whole life, you don’t have to worry about premiums jumping each time you go to renew – the rate that you lock in on day one is the rate that you’ll pay when you’re 80, too. Age, health issues… they won’t impact how much you are dishing out for premiums.
If you know that you will need coverage for life (providing for a special needs child, for instance), or if the potential for health issues is suspected, whole life can make the life insurance process easier.
It may even earn dividends
In addition to your cash value building over time and earning interest, there’s one more monetary reason why whole life could be considered superior to term life insurance: with some companies, you have the potential for annual dividends.
While dividends are not guaranteed, they are a neat future of many policies. These financial surplus payouts can be applied toward your monthly premiums, deposited in your cash value account and used to earn more interest, taken out in cash, or even applied toward additional coverage.
The negatives of whole life
Of course, this type of policy is not without its downsides, too.
One of the biggest deterrents of a whole life policy is the fact that they are significantly more expensive than their term life counterparts. While they often even out or even surpass term life policies in value over time, this requires holding onto them for many years. This is also the case with the cash value; you won’t see any recognized value from your account for quite a while.
Speaking of the cash value, it’s important to note that withdrawals are not always tax-free. You can borrow against the value at any time, up to the amount that you’ve paid in premiums. Start dipping into the interest of the account, and you’ll owe taxes on it. Plus, of course, there’s the risk involved with taking out a loan – if you were to pass away before repaying it, your family would be left with a diminished death benefit.
Whole life policies almost always require a health exam. If you are looking for a quick quote and to commence coverage very soon, this could be a deterrent. There are some whole life policies available without a health exam, but be prepared to pay more in premiums for them.
The last downside to whole life coverage is the fact that it’s permanent. While many consumers may choose it specifically for this feature, it’s not for everyone. If your primary concern is providing for your family during your big income-earning and child-rearing years, you could find the premiums to be unwarranted (and overwhelming) later on down the road. If 20 years from now you find yourself in a secure place financially, without children or a spouse who rely on your income, the cost of your whole life policy may weigh heavily.
Which is Right for You?
Deciding whether to purchase a term or whole life insurance policy is a very personal question, involving many specific questions. However, there are a few strong rules of thumb when debating the two types of coverage.
You should choose term life insurance if:
- You want to pay as little as possible for as much coverage as possible.
- You only need to provide life insurance for a period of time, such as during the years when your children are young or until your spouse can access retirement assets.
- You want to avoid a health exam.
- You want the option to convert your policy later down the line.
Conversely, you should choose whole life insurance if:
- You know for certain that you want life insurance coverage for the rest of your life.
- You have dependents who will rely on you for many years to come, such as a special needs child or disabled spouse.
- You are older or have/worry about developing health concerns.
- You want to get something from your monthly premiums, rather than have that money go to waste when the term expires.
- You want a life insurance product that doubles as an asset, retirement fund, or even an inheritance.
- You want to ability to earn interest on your life insurance policy’s (cash) value, and even the potential for annual dividends.
Making the decision to buy life insurance can take some back-and-forth. Then, determining how much life insurance to purchase is even more tricky. Once you have all of that locked in, though, you still need to choose between a term and a whole life insurance policy.
The differences between the two insurance products are significant, and it’s not a decision that should be made lightly.
If you are still unsure as to which type of insurance is right for you and your family, contact our team of licensed life insurance coaches. They can help answer your questions, provide guidance toward the perfect policy, and even send you free quotes for coverage.