If you are new to shopping for life insurance, the term life insurance vs whole life insurance can be a confusing experience! As with any product you are not familiar with, there is a lot of language and terminology to learn. There are also many different insurance companies, rate plans, and features to compare.
A beginning life insurance shopper must start somewhere. For most people, this means deciding which type of insurance policy is best for their unique circumstances. For most of us, that decision will come down to whether to purchase term life insurance or whole life insurance.
So, What Is Term Insurance?
Term insurance is the simplest and most affordable insurance product available to most consumers. Let me explain how it works:
- You decide how many years you will need your life insurance coverage (we can help you with this).
- Your age and health are used to determine your monthly/yearly life insurance premium.
- You pay a premium for the specified number of years.
It is that simple!
The premium will be level for the entire term of the life insurance contract. The coverage amount will also be level for the entire term life of the insurance contract.
Term Life Insurance Examples
If you have a 20-year term life insurance policy, with a $250,000 guaranteed coverage amount, for a premium of $50 a month, your premium would be $50 a month for the entire 20 years. Your guaranteed coverage amount would be $250,000 for the entire 20-year period.
When the 20 years is up, you may have options, depending on the insurance company and policy you selected. Sometimes, your term life insurance policy may simply expire at the end of the term period.
Some life insurance plans have a convertible option or conversion privilege. With either of these two life insurance options, you have more flexibility in your financial planning. These plans allow you to convert your term policy to a permanent policy should your insurance or financial needs change.
Some term insurance plans guarantee insurability up to age 95. So, if you were 40 years old when you originally purchased your term life insurance plan, at the end of 20 years, your premium would be recalculated at your current age of 60 years old.
In this example, your death benefit (the face amount of the policy) would remain unchanged. However, your insurance premiums would increase substantially at the end of the 20-year period.
Purchasing life insurance when you are younger and healthier guarantees you the best insurance rates for the next 20 years (if you had a 20-year term life policy).
With any term life policy, even if you get sick, your health changes dramatically, or you get a terminal illness after the policy goes into effect, your monthly premium will not increase. Your guaranteed death benefit will also never go down.
What Is Whole Life Insurance?
Whole life insurance is one of the most popular permanent life insurance protection options available.
There are other insurance options available, but this one is, by far, the most popular. Here is how it works:
- A whole life insurance policy does exactly what its name implies – provides coverage for your whole life.
- If you are looking for a permanent life insurance policy with an investment component included (known as cash value accumulation), then this is the right plan for you.
- The cash value component of a whole life insurance plan means that, as time goes on, your policy will build cash value within your policy.
In the future, you can borrow against the cash value in your policy. Because you are borrowing against the cash value in the life insurance policy, this is considered a loan against your insurance policy. The great part is there is no set period you must pay it back!
What Is The Difference Between Term Life Insurance And Whole Life Insurance?
Term life insurance vs whole life insurance, both are very popular insurance products, but there are differences you need to consider before purchasing. Here are a few:
The Length of Coverage – Consider if your financial needs will be permanent or temporary. If you want to make sure your home gets paid off if you die, and you have a 30-year home loan, then a 30-year term policy would be a perfect fit.
Some people will buy a base level of whole life insurance that will last their entire life and then supplement it with additional term life insurance, based on other temporary financial obligations.
The Cash Value – Term life insurance does not have or accumulate cash value (whole life insurance accumulates cash value). If you are buying term life insurance, you are buying it strictly for the life insurance protection component only.
The Cost – Term insurance will always be cheaper than whole life insurance. Because whole life insurance has an investment component and a guaranteed death benefit no matter what age you die, it will always be more expensive than term life insurance.
In a nutshell, those are the major differences between term life and whole life insurance.
Which Insurance Policy Is The Best Fit For Me and My Situation?
The term vs. whole life insurance pros and cons discussion depends on your financial situation and your financial needs. If you have financial responsibilities for a certain period, such as a 10, 15, 20, or 30-year mortgage, then term life insurance is a great solution.
If you have children you want to send to college and you want to make sure their education is paid off if you die, then term life insurance is a great solution.
The key area to think about with term life insurance is to use it with financial responsibilities and obligations that last for a specified period of time.
If your life insurance needs extend beyond the term of your policy, you can always convert it to a permanent policy if the plan you purchased has that option available.
Final Expense Policies
Whole life protection plans are often bought as final expense policies. If you do not have $10,000 in the bank to pay for your burial, a whole life plan can take care of this problem for you.
As far as the investment option with the cash value and whole life plan, I always tell people to buy the insurance primarily for the insurance component, and any cash value gains within the policy are a bonus.
Never buy whole life insurance strictly as an investment vehicle, unless you are maximizing all other investment opportunities.
Another area where whole life can be used is estate planning to pay for any end of life expenses or expenses that would put your estate at risk when you die. If you have questions about this, call us.
But Wait…There’s More! What is Universal Life Insurance?
There is one more insurance plan that is a hybrid between term life and whole life; it is called universal life insurance. Some people also call this permanent term life insurance.
A universal life policy accumulates cash value, but only at an amount to keep your insurance premiums level throughout the length of the policy. These policies can be cheaper than a whole life insurance policy and still offer you the protection you need as you grow older.
Ask your insurance agent lots of questions to see if this is the right fit for you; don’t be afraid to ask for details! Make sure your insurance agent can compare and offer quotes from many insurance companies to get the best bang for your dollar.
An independent agent or agency should point you in the right direction based on your financial needs, your future financial obligations, and the lifestyle you would like to maintain when a loved one dies.
It can be confusing and overwhelming for a newcomer to life insurance to select the correct life insurance plan! That is why it is always helpful to have an insurance agent you trust and who can communicate what the life insurance companies offer and what will be best for you and your unique needs.
Term or whole life for seniors?
This depends on your age, your health, and type of insurance policy you are looking for.
All life insurance products have a place in most people’s lives at some time. Term is going to be the most useful insurance product for most people. Call us and we can help you understand what options are best for you and your situation.
Life-Wealth-Win Life Insurance and Wealth Services would love to help you get your loved ones, family, and business protected! Call us or get your free life insurance estimate by clicking the link below.