Term Life Insurance vs. Whole Life Insurance

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Life insurance is a necessity if you have someone who relies on your income. Life insurance will help you ensure your loved ones have enough money to survive comfortably if you die. While almost everyone understands the need for life insurance, not everyone understands the different types of life insurance that are available. If you…

Life insurance is a necessity if you have someone who relies on your income.

Life insurance will help you ensure your loved ones have enough money to survive comfortably if you die.

While almost everyone understands the need for life insurance, not everyone understands the different types of life insurance that are available.

If you are in the military, you are probably eligible for Servicemembers’ Group Life Insurance (SGLI), which is a low cost group life insurance policy available to active duty military members and their families.

If you separate from the military, you may be eligible to Convert your SGLI Policy to a VGLI policy, which will help you continue your coverage after you separate from the military (here is more info on Veterans’ Group Life Insurance (VGLI)).

SGLI and VGLI are good options for many military members and veterans, but you may find they don’t offer you enough coverage for your life insurance needs.

When deciding how much life insurance you need, you should consider not only how much life insurance you need, but which type of life insurance is best for your situation.

See How much life insurance should military members buy for another take on this important topic.

There are several types of life insurance available, but the two most common are term life insurance and whole life insurance.

Let’s compare the two to help you get a better understanding of which is best for your situation.

Term Life Insurance vs. Whole Life Insurance

Term Life Insurance

Term life insurance and whole life insurance are very different policies. A term life policy is just that – a policy that lasts for a certain time period, called the term. Term life insurance is more affordable than a whole life insurance policy and is a popular option because of the low cast and relatively long terms it provides. Most term life policies can be purchased with durations of 10, 15, 20, 25, or even 30 years. The monthly premium and death benefit will remain level during the duration of the term.

How does term life insurance work? Each month for the duration of the term, you pay a premium which gives you a fixed rate death benefit. If you die one month into coverage, you will receive 100% of the payout. The same thing goes if you die one day before the policy expires.

Advantages of term life insurance. Term life insurance offers low premiums and high death benefits. However, term life insurance accrues no cash value. Once the term ends, your coverage, and all the money you paid into premiums is gone.

Whole Life Insurance

Whole life insurance, also called permanent life insurance, provides coverage throughout the insured member’s lifetime, sometimes with an upper age limit of 100 (be sure to check your policy for more information). The policy will always remain in effect so long as the premiums are paid in full, according to the whole life insurance contract.

How does whole life insurance work? With whole life insurance, you pay into a permanent life insurance policy. Premiums are often substantially higher than term life insurance policies, but the whole life insurance policy will accrue cash value in the form of dividends. Over time, the value of the whole life insurance policy will increase.

Advantages of whole life insurance. Whole life insurance has unique advantages because it accrues cash value. Whole life insurance can act as a forced savings account, which over time can accrue a substantial value. Because it has cash value, you may be able to borrow cash from the accrued value of your whole life insurance policy. However, be sure to check the terms and conditions of your policy before assuming this is a good deal, as there can be fine print involved. You may also be able to use the cash value of your permanent life insurance policy as collateral for a loan or even surrender the life insurance policy for its cash value. Keep in mind you should never surrender a life insurance policy unless you have another life insurance policy in place.

The disadvantage of whole life insurance policies is that the premiums are substantially higher than term life insurance policies. Many financial experts recommend determining the monthly premiums of a whole life insurance policy, then buying term life policy and investing the monthly difference in a mutual fund or other investment.

Should You Choose Term Life or Whole Life?

How do you choose between the two main types of life insurance? The answer comes down to balance. How much can you afford to spend on life insurance premiums each month, and how much coverage will you get? Will the insurance policy you choose be enough to satisfy the financial needs of your family if you were to pass away? The answers to these questions will go a long way to help you determine which type of life insurance will help you meet your needs.

Which is better – Term or whole life insurance? The answer isn’t as straightforward as one might think. Term life insurance is popular because it offers high coverage and low premiums, and whole life insurance is popular because it accrues cash value. Both types of life insurance policies can help replace your income and provide for your family if you pass. The answer comes down to this: buy the form of life insurance which is most suitable for your needs and will offer the best financial protection for your family.

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About Ryan Guina

Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Meilie Moy-Hodnett says

    This is an interesting article, but I would like to enlighten those who are reading.

    A whole life insurance policy is one of the most popular and legal ways of getting a consumer to waste their money. Unless they die at a very tender age and have over insured themselves, the money “accrued” is never going to be substantial enough to compare to investing the same money in a mutual fund or other investment as suggested. The “savings account” concept is a good idea IF the interest rate can compare to other investments, but the whole life policy will never pay more than a very low percentage rate, as this is how the insurance companies make money: by over charging for a product, and keeping your money.

    The reality check on the whole life insurance policy is that more than not, if you have saved $$ dollars in this account over a number of years, the policy states that when the insured dies, the beneficiaries will get “either” the amount of the savings accrued “OR” the amount of the policy, but NEVER both. Why not? You have diligently paid the premiums and saved the money that should ALL be yours. Right? NO. This is not to the benefit of the insurance company selling whole life insurance policies. They get to keep either the savings (your money) OR the money that the policy is written up for. You get one OR the other, not BOTH.

    Now, if you had saved money in an investment (such as US Savings Bonds for those who are squeamish, or a more aggressive mutual fund for the young and eager) and have a TERM life insurance policy in the event of death, then your beneficiaries would have BOTH, the savings/investment monies AND the TERM life insurance policy payout.

    So, if you have a Whole Life insurance policy, take a good look and check out the paragraph that says what your payout is. Chances are high that is states it pays out “either, OR” not both accrued savings and policy value.

    If your whole life policy does state you get both. I’d like to hear about it. I’d also like to hear what your interest rate payout is, as it’s probably pitifully low. I found out the hard way, BUT, I also learned early on not to play their game and saved my money separate from a life insurance policy.

    Remember, if you start saving NOW (in your 20’s) you will have more to live on in your 60’s. It’s not easy when money is tight, but when you are young, you have time to save. When you’re old and have no money saved, then what? You’ll be living in a cardboard box in the back of a shopping mall or maybe behind one of those tall, beautiful insurance company buildings. Save now for tomorrow, but only if you believe there is a tomorrow. [$10 a day saved = $3,650. a year, add compound interest of your age until age 65 and that could be hundreds of thousands of dollars.]

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