by Term life insurance is more affordable than whole life insurance, but it covers you for a specified period.
Table of Contents
Introduction
If you’ve decided to buy life insurance but are confused about which policy, you should get. It’s important to understand the difference between term and whole-life policies. Both offer a death benefit to your beneficiaries, but they work in different ways.
Understanding Term & Whole Life Insurance
You must understand the difference between term policies and whole-life policies.
Term Life Insurance
What is Term Life Insurance?
Term life insurance covers a specified period (e.g., 10, 20, or 30 years). It pays a death benefit to your beneficiaries if you die during the term. If you outlive the term, the coverage ends, and there is no payout. Think of it as “temporary” coverage for a specific period.
Types of Term Life Insurance
- Level Term Life Insurance
- Decreasing Term Life Insurance
- Annual Renewable Term Life Insurance
- Convertible Term Life Insurance
Whole Life Insurance
What is Whole Life Insurance?
Lifetime insurance offers coverage as long as the premiums are consistently paid. It also Increases cash value over time, which can be borrowed against or used to pay premiums. Whole Life Insurance offers a guaranteed death benefit and a guaranteed cash value component, making it a more comprehensive and permanent form of coverage.
Types of Whole Life Insurance
- Traditional Whole Life Insurance
- Variable Whole Life Insurance
- Universal Whole Life Insurance
- Indexed Whole Life Insurance
- Participating Whole Life Insurance
- Non-Participating Whole Life Insurance
Benefits of Term Life Insurance
Death Benefit
Term life insurance provides a sense of security by ensuring a guaranteed payout upon death. Should anything happen during the policy term that requires it, your beneficiaries will receive an equal payout to its face value; so no worries need be given about outliving savings or social security payments in your absence.
Flexibility
While death benefits may be the main motivation for purchasing life insurance, term policies also offer several other features that make budgeting simpler for many families. Furthermore, some policies come equipped with conversion features enabling policyholders to switch over to whole-life policies by using part of the death benefit to cover the cost of switching plans.
Benefits of Whole Life Insurance
Lifelong Coverage
Whole Life Insurance Benefits While term policies offer fixed death benefits at purchase time, whole life policies offer the potential to build cash value over time by allocating part of each premium payment towards creating tax-efficient financial assets in your policy. As time progresses, this accumulated cash value could become larger than its sum one key selling point of this type of policy.
Dividends
Whole life insurance offers another attractive feature “Dividends”! Dividends represent part of an insurance company’s profit and can be used to lower premium payments or even boost the death benefit of your policy.
Whole life insurance might have a price tag compared to term life policies. It also offers a range of additional benefits. One such advantage is a guaranteed death benefit that lasts throughout your lifetime provided you pay your premiums regularly.
Cost of Term vs Whole Life Insurance
Cost is a significant factor to consider when choosing between whole and term life insurance. Term life insurance is often the most affordable option because it provides temporary coverage and has no cash value component. In contrast, whole life insurance premiums are substantially higher due to the lifelong coverage and cash value accumulation. Here’s a comparison of annual premiums for term life versus whole life insurance policies:
| Gender | Age (Years) | Term Policy (20 Years) | Whole Life Policy |
|---|---|---|---|
| Male | 20 | $216 | $3,593 |
| Female | 20 | $177 | $3,173 |
| Male | 30 | $221 | $4,940 |
| Female | 30 | $186 | $4,407 |
| Male | 40 | $334 | $7,440 |
| Female | 40 | $282 | $6,512 |
| Male | 60 | $2,352 | $16,698 |
| Female | 60 | $1,656 | $14,375 |
| Male | 70 | $9,436 | $29,632 |
| Female | 70 | $7,943 | $25,510 |
Coverage
Whole life insurance, also known as permanent coverage, provides death benefit protection for your entire lifetime. It also builds up a tax-deferred cash amount that you can use to cover premiums or borrow from. Typically, you will pay a fixed amount regularly, either monthly, quarterly, semi-annually, or annually. You can choose a limited payment period, such as 10 or 20 years, or you can pay a single premium, which will allow you to build up an equity account right away.
Most Whole Life policies offer a guaranteed premium rate for the duration of your policy. This is important to families that rely on the income of one person or business owners who need to buy out a deceased partner’s share of the company. Term policies, on the other hand, do not guarantee their premium rates, and they can increase over time.
The difference between term and whole life insurance depends on your financial goals. A good rule of thumb is to consider how much you’d like your beneficiaries to receive in the event of your death. This will help you decide which kind of policy is right for your needs.
Conventional whole-life insurance plans rely on projections of costs, interest rates, and life expectancy over a period. You can choose from a non-participating or participating policy. A non-participating policy offers a level premium throughout your life and a fixed death benefit, while a participating policy gives you a portion of the insurer’s investment earnings as a dividend. This dividend can be used to reduce premiums, earn interest on the accumulated cash value or purchase paid-up additions.
Taxes
When deciding whether to purchase term life insurance or whole life insurance, it’s important to consider the taxes. Term life insurance is more affordable and offers the flexibility of changing policies over time as your circumstances change. On the other hand, whole-life policies are more expensive and include both investment and coverage components. It’s an option, for people looking for long-term security and a way to save money.
Whole life insurance builds cash value over time, which functions like a tax-deferred savings account. This account is a part of the premium you pay and can be accessed through policy loans or withdrawals. However, these loans and withdrawals will reduce the death benefit of your policy.
While some financial advisers recommend using life insurance as a form of investing, most people choose to use it as a tool to provide a guaranteed death benefit for their loved ones. This is why federal and state law protects these payouts from taxes.
If you’re considering buying a permanent life insurance policy, be sure to consult with a professional to determine the right type of policy for your needs and budget. It’s also important to consider your long-term financial goals, so you can make an informed decision about what type of policy is right for you.
Cash value
Whole life insurance policies build a cash value component that you can access at any time. The cash value can be used for many purposes, including paying premiums or taking policy loans. This feature is one of the main differences between term and whole life insurance. However, you should be aware that accessing the cash value will reduce your death benefit and could potentially lead to tax consequences.
Term life insurance provides a flexible coverage period that can align with your family’s needs and financial goals. It is also cheaper than Whole Life insurance, making it a good choice for people who want to avoid the high costs of a permanent policy. However, you should consider whether a temporary life insurance policy is worth the cost in light of your other savings vehicles and financial goals.
In addition, you can compare term and whole life insurance to determine which is more affordable for your specific situation. You may also want to consider a combination of both term and whole life insurance, depending on your needs and financial goals. You can find a financial professional online or in your community.
Read More About Life Insurance
Conclusion
After understanding the difference between term and whole life insurance, you can easily make an informed decision that aligns with your financial goals and needs. By considering your circumstances, financial objectives, and budget, you’ll be empowered to choose the right type of policy that suits your lifestyle.
Whether you opt for the flexibility of term life insurance or the lifelong protection of whole life insurance, you’ll be taking a responsible step toward securing your family’s future. With this knowledge, you’ll be confident in your ability to make a decision that will bring you peace of mind and financial security for years to come.
FAQ’S
What’s the main difference between term and whole life insurance?
Term life insurance covers you for a specified period, while whole life insurance provides lifelong coverage and a cash value component.
Which type of insurance is more affordable?
Term life insurance is generally more affordable due to its lower premiums.
Can I borrow against my whole life insurance policy?
Yes, whole life insurance policies accumulate a cash value that you can borrow against or use to pay premiums.
What’s the benefit of whole life insurance’s cash value component?
The cash value component grows over time and can be used as a tax-deferred savings account.
Can I change my term life insurance policy as my circumstances change?
Yes, term life insurance offers flexible coverage periods that can be adjusted as your needs change.
