Life insurance provides a death benefit after the insured passes away, which could be critical to supporting surviving loved ones. Making decisions about insurance coverage is never easy, especially when you’re choosing between term life and whole life insurance policies. Term policies work differently from whole life policies, and each has pros and cons. When choosing between these two options, it is important to study them carefully to make the right choice.
This guide provides insight into how both types of policy work and which is best for different situations.
What is term life insurance?
Term life insurance is a type of life insurance coverage that provides protection for a specific period, known as the term. This type of policy is usually the most affordable life insurance option and provides coverage for a specific length of time, such as 10, 15, or 20 years.
Term life insurance provides coverage only for a specific period of time. This is the key difference between term vs. whole life insurance, which is another kind of life insurance.
Term life policies offer coverage in exchange for premium payments, but once the policy's term ends, the coverage lapses, meaning the policyholder will have to apply for a new policy if they want to continue coverage.
The pros of term life insurance include affordability, flexibility, and simplicity. However, one significant disadvantage of term life insurance is that the policyholder may outlive the policy term, meaning their beneficiaries will not get a payout. This is the key difference between term vs. whole life insurance, which is another kind of life insurance.
What is whole life insurance?
Whole life insurance, also known as permanent life insurance, provides coverage until the policyholder's death, as long as the premiums are paid, and the policy remains in force.
The pros of whole life insurance include guarantees of coverage as long as the premiums are paid, the savings component that builds cash value over time, and the death benefits that never expire. However, whole life insurance is expensive, and the savings component's returns may not match those of other investment options.
One key difference between term vs. whole life insurance is the amount of time the policy is in effect. Whole life insurance doesn't have a set coverage term. As long as the policyholder keeps the policy active, it remains in effect. Someone could pass away five years or 50 years after buying whole life insurance, and the death benefit would still pay out.
The other key difference between term life vs. whole life is that whole life policies are much more expensive. These policies generally have higher premiums because they combine an insurance component with a savings component. In a whole life policy, the cash value of the policy increases over time, and policyholders may withdraw or borrow money from the policy tax-free.
When deciding between term vs. whole life insurance, policyholders should think about whether they want to invest in life insurance.
What term and whole life insurance have in common
Term insurance and whole life insurance are two different types of life insurance policies. However, they both serve the same purpose, which is to provide financial protection to the policyholder's loved ones in the event of their passing.
It's a good idea to consider similarities when deciding between term vs. whole life insurance. Many of the best life insurance companies offer both types of policies. Consumers can choose which one makes the most sense for their specific situation after evaluating term life vs. whole life similarities and differences.
Here are some things term and whole life policies have in common:
- Both provide a death benefit. But when they pay this benefit varies. Term life policies only pay the death benefit if the policyholder dies during the coverage term. Whole life policies always pay it out.
- Both typically require a medical exam. However, that's not always the case in every situation, so it's best for consumers to ask.
- Both typically price premiums based on risk. Older policyholders or those with health issues pay more.
- Both policies require premiums to be paid. The policyholder will need to continue paying the premiums to keep the policy in force.
- Death benefits are typically tax free for beneficiaries. This is true for both policy types.
These similarities between term life vs. whole life are important, and they show that, ideally, both kinds of insurance should be purchased when young and healthy. Both provide protection for loved ones after death.
Term life vs. whole life: Cost comparison
Whole life policies are much more expensive than term life policies. In fact, rates for whole life policies are typically between five and 15 times more expensive than term life policies. This is one of the biggest differences between term vs. whole life insurance.
Term life policies are cheaper because:
- They aren't in effect for as long
- There's no guaranteed payout of the death benefit
- There's no savings component
- The policies don't acquire a cash value
Whole life policies cost more because some of the premiums are invested. And the insurer must pay out the death benefit regardless of how old the policyholder is when they pass, as long as the insurance is still in effect.
RELATED: What Is 10-year Term Life Insurance?
Term vs. whole life: Cash value
Term life policies are the more affordable life insurance option, but they do not acquire a cash value. The only way the policy pays out money is if the policyholder dies while covered.
Whole life policies, on the other hand, serve as a savings vehicle. This is a big disparity between term vs. whole life insurance. A whole life policy always accrues a cash value. The policy could be surrendered and the insurer would pay the cash value, minus fees.
Sometimes, money can be withdrawn from whole life policies. And policyholders can typically borrow against the cash value. The insurer provides the loan. If there is a remaining balance on it, it's deducted from the death benefit.
However, it's important to keep in mind that the cash value is often accompanied by higher premiums and may not offer the same flexibility as other savings options. It ultimately comes down to individual preference and needs, but understanding the impact of cash value can help you make an informed decision.
Term life vs. whole life: Pros and cons
When considering whole life or term life insurance, it's best to look at the pros and cons of each. The table below demonstrates the advantages and disadvantages of term vs. whole life insurance.