Life insurance is an essential financial tool meant to safeguard your loved ones when you pass. But choosing the right life insurance policy makes all the difference, as you want to ensure your investment suits your family and financial situation. You may also save significantly by understanding the difference between whole and term life insurance.
The main difference between whole and term life insurance is the duration and cost of the coverage. Term life policies offer temporary coverage for a specific period, while whole life policies offer lifelong coverage. Also, term life is more affordable than whole life, making it an attractive, short-term option.
Let’s go deeper into the term life vs. whole life insurance debate, starting with an overview of each policy. But let’s first do a quick recap of the basics of life insurance.
What Is Life Insurance?
Life insurance is a contract between an insurer and an insured individual, in which the insurer promises to pay out a lump sum, the death benefit, to your named beneficiaries upon your demise. In return, you, the policyholder (insured individual), pay premiums to keep the coverage active.
Insurance companies calculate your life insurance premiums by basing their underwriting decision on your age, health status, lifestyle, and the chosen policy, among other factors. So, premiums may vary for different individuals, even for the same type of life insurance.
Now, let’s go over the two main types of life insurance, discussing their main distinguishing features.
Understanding Whole Life Insurance
We all hope to live long, full lives, but how long we will actually have is unpredictable. Whole life insurance provides permanent coverage until the policyholder’s demise, making it a lifelong investment.
Whether a life is cut short shortly after the policy is in place or decades after, a whole life insurance will be there. Either way, your beneficiaries will receive the death benefit.
The premiums you pay over your lifetime also count as saving, because the policy accumulates a cash value over the years. Therefore, you can take out loans using this policy or even cancel them by redeeming the accumulated cash value.
The Core Aspects of Whole Life Insurance
1. Death Benefit
This refers to the amount of money your beneficiaries receive upon your demise. Ideally, it should be substantial enough to cover funeral costs, medical bills, settle some debts, and still support your loved ones until they find ways to sustain themselves.
These are the regular payments you pay your insurance company to maintain coverage. You can opt for monthly or yearly premium payments.
3. Cash Value
This coverage offers a savings component that accumulates over time; you can use it for borrowing or surrendering the policy for a lump sum.
4. Permanent Coverage
This insurance option stays in effect until the policyholder’s death. It may also mature upon your retirement when you can’t raise any more money to pay premiums.
5. Guaranteed Cash Value Growth
Your accumulating savings accrue interest at a fixed rate regardless of market demands. Thus, this insurance policy also qualifies as an investment vehicle that does more than just restituting your losses.
Unique Features and Advantages
Whole life insurance offers several unique features and perks, including:
1. Lifelong Coverage
As mentioned earlier, whole life insurance is permanent, providing the comfort that your family won’t burst upon your demise.
2. Fixed Premiums
Your insurer will calculate the suitable fixed premiums for you to pay throughout the lifetime of your policy so you can budget and plan for the future.
3. Cash Value Accumulation
You can approach whole life insurance as a savings avenue as your premiums accrue a cash value with a fixed growth rate. To find out the difference between insurance and savings, please read ‘Life Insurance vs. Savings Account.’
4. Tax-Deferred Growth
The cash value accrues interest on a tax-deferred basis. You only pay capital gains tax on it when you decide to cancel and redeem your cash value before maturity.
5. Guaranteed Death Benefit
The death benefit for whole life insurance is guaranteed and will not decrease over time as long as you keep paying premiums.
6. Better Access to Lending
You can secure loans using your policy’s accumulated cash value as a lien in case of emergencies.
How Age Affects Your Whole Life Insurance Policy
Your age and life expectancy significantly affect the cost of whole life insurance. Age is also a determining factor in how much coverage you can purchase.
Generally, insurers will charge you higher premiums if you wait longer to get insured. For example, a 25-year-old may be given a fixed premium of $70 for the rest of their life, while a 40-year-old may have to pay $130 for the same coverage.
Why, though? Insurers assume younger individuals are healthier and have a longer life expectancy, meaning they will pay premiums for a more extended period.
On the other hand, if you purchase whole life insurance at an older age, your premiums will be higher and may limit the coverage you can obtain. Insurers perceive older individuals as having a shorter life expectancy, which means paying out the death benefit sooner.
Insurers are more profitable if you start paying premiums when you are young and die in your 90s. Passing just a few years after purchasing a policy doesn’t provide insurers much opportunity to invest and earn returns on their premiums.
Let’s say you get life insurance in your early twenties and pass on due to an accident just a few years later. Your dependents will be entitled to a death benefit, so the insurer may have to pay out more than you’ve contributed.
But accidents like that are rare, and most young people pay premiums for several decades before their beneficiaries receive the death benefit. We can’t say the same for elderly or ailing people who take up whole life insurance. They’re more likely to die sooner, so insurers will collect fewer premiums and pay out the death benefit sooner than they would like.
Additionally, age affects the cash value of a whole life insurance policy. As you grow older, your premium payments are no longer enough to cover the cost of insurance and other fees. So, your policy’s cash value growth may slow down and not reach its projected amount by maturity.
On the other hand, purchasing whole life insurance at a younger age allows more time for the policy’s cash value to grow. You have a higher chance of reaching or even surpassing the projected cash value by maturity.
Understanding Term Life Insurance
Though we’re all guaranteed to pass on, sometimes, death may visit us when we least expect it. From accidents and human malice to natural disasters and illnesses, sometimes we can’t control our fate.
So, how do you cushion loved ones in case of your sudden demise? Term life insurance empowers insurance holders to choose the coverage length, usually 10 to 30 years. You can also choose the amount of money that will be paid out in the event of your death.
It empowers you to personalize your policy to fit your needs and budget. If you die while the term is still active, your loved ones qualify to get the death benefit. However, if you outlive the term, there is no payout.
The Core Aspects and Benefits of Term Life Insurance
1. Affordable Premiums
Term life insurance has lower premiums than whole life insurance, making it more accessible to the working class.
2. Flexible Coverage
This policy allows you to decide how long your policy lasts and how much your dependents will receive. The actuaries then calculate how much premiums are necessary for that personalized coverage.
Term life is easier to understand and plan for as it counts only as insurance and not as an investment vehicle.
4. Short-Term Financial Protection
Term life insurance is perfect for covering expenses such as mortgages, debts, or your children’s education if you pass away unexpectedly.
Whole Life Insurance vs. Term Life Insurance
1. Premiums: Cost comparison and Structure
You’re likely to pay much higher premiums for whole life insurance than term life because whole life entails a savings factor on top of the normal insurance cover.
Actuaries impose a fixed lifetime premiums rate, while term life insurance premiums increase every time you try renewing.
2. Duration and Terms of Coverage
Whole life covers you for life as long as you pay premiums, while term life only covers you for the period specified in the contract, which spans between 10 and 30 years.
You can cash out your whole term life at any time, but you can never cash out your term life insurance premiums.
3. Choosing the Right Policy for You
Your current financial standing and the nature of your work should influence your decision: term or whole life insurance.
Whole life insurance may be better for those seeking lifelong coverage, but they should embrace paying costlier premiums.
Term life insurance may be more suitable if you can’t afford whole life insurance and want to cover your loved ones when they’re most vulnerable without you.
In summary, term and whole life insurance significantly differ in cost, duration, and cash value. It’s crucial to consider carefully your current financial situation and the kind of legacy you intend to leave for your loved ones to determine which policy suits you best.
If you want lifelong coverage and can afford higher premiums, go for whole life insurance. However, if you need temporary coverage at an affordable cost, term life insurance may be the right choice.
Ultimately, both policies offer essential protection for your loved ones in case of unexpected events. That’s why you need to learn how to convince a loved one to buy life insurance. Once you do, find out what qualities make a life insurance company better to ensure you choose the best provider for your needs.