Which life insurance policy is right for you? Whole life or term life? This is a question that many people struggle with, and the answer depends on your individual needs. This guide will compare whole life insurance vs. term life insurance to help you decide which one might be the best fit for you.
- Term vs. Whole Life Insurance
- What is the difference between term life insurance and whole life insurance?
- Whole life and term life insurance: The Basics
- Life Insurance Whole vs.Term: How Much Does It Cost?
- Term vs. whole life Insurance: Factors To Consider
- Compare Whole Life Insurance With Term Life Insurance
Term vs. Whole Life Insurance
You can get lifelong coverage and support with whole life insurance. Term life insurance is cheaper, but you only get coverage for a certain amount of time. If you die prematurely, your family will have the money to do things like pay for funerals, mortgage payments, college tuition, or other expenses with either type of life insurance.
What is the difference between term life insurance and whole life insurance?
- Term life insurance is the simplest type because it covers you for a fixed time period. However, if you don’t die during that time, then no one will receive any money. Terms range from 5 years to 40 years in length.
- Whole life insurance is more expensive, but the policy has its own benefits too. One of those benefits is that you can use the money in the account (cash value) for later in your life. Also, whole life insurance covers you until you die, while term insurance only lasts a certain amount of time.
Whole life and term life insurance: The Basics
What is term life insurance?
Term life insurance is called pure life insurance because it only protects your dependents. If you have a term policy and die when the insurance is active, the beneficiaries will get the death benefit tax-free.
You choose how long the life insurance policy lasts when you buy it. A common term is 10 years, but you can do 20 years or 30 years. The cost of the policy stays the same throughout the life of your plan, and so does the payout.
Tips When Shopping For Term Life Insurance
- The term for life insurance is the number of years you will be paying bills. Choose a term that will help protect your family if you die. For example, purchasing a 30-year term to reflect your bills on a mortgage payment.
- If you were not around, your family would need a certain amount of money to live to maintain their current lifestyle. Purchase an amount that will reflect their monthly expenses.
Ideally, your need for life insurance will end around the time the term life policy expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.
What is whole life insurance?
Life insurance that provides lifelong coverage is called whole life insurance. The premiums will accrue interest tax-deferred while the policy is active.
You can borrow money against the account through a loan. There will be interest to pay on the loan, and if it’s not repaid, the death benefit for beneficiaries will be reduced. You can also surrender the policy for a cash payout as well. There may be fees and surrender charges involved. If you surrender the full policy amount, you will no longer be covered.
Whole Life Insurance Highlights
- The annual premium for whole life insurance remains the same.
- The death benefit is guaranteed while the premiums are being paid.
- The cash value account grows at a fixed interest rate like a fixed annuity or a certificate of deposit (CD).
Some whole life insurance policies earn dividends. You can take these in cash, leave them in your account to earn interest, or use them to decrease your premium payments or repay policy loans. Dividends are not guaranteed.
Life Insurance Whole vs.Term: How Much Does It Cost?
Term life insurance is cheaper because it only lasts for a limited time. Your beneficiaries will not get any money if you live beyond the end of your term. Whole life insurance is more expensive because it lasts for your whole life and has a cash value that earns a guaranteed return on cash value.
Below are monthly price comparisons between term life and whole life insurance. The most common term length is 20 years, and we will use a $1 million life insurance policy for the coverage amount.
|Person covered||Whole life||20-year term life|
|30-Year Old Male||$569||$31|
|30-Year Old Female||$513||$24|
|40-Year Old Male||$879||$49|
|40-Year Old Female||$799||$41|
|50-Year Old Male||$1,421||$133|
|50-Year Old Female||$1,287||$96|
Term vs. whole life Insurance: Factors To Consider
Purchase term life insurance if you:
- If you only need life insurance to replace your income for a limited amount of time, like the years that you’re paying off your mortgage or raising children.
- You want the cheapest coverage.
- You can’t afford whole life insurance now but want it later. Most term life policies ARE convertible to permanent coverage.
Purchase whole life insurance if you:
- You want to reduce estate taxes on the inheritance for your heirs.
- If you have a child with disabilities, life insurance can help fund a trust to provide care for that child.
- You want to leave money aside for final expenses, such as funeral costs.
Compare Whole Life Insurance With Term Life Insurance
I’m a licensed financial professional. I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.
My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you.