Term Life Insurance vs. Whole Life Insurance

Comparing term and whole life insurance policies is important before deciding which life insurance policy is the best for your needs.
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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 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.

Several types of life insurance are 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

This article explored the advantages and disadvantages of term and whole life insurance policies. Term life insurance and whole life insurance are very different policies. Each plan is an excellent option for insurance coverage, but every family is going to need different types of coverage based on their needs. It’s vital you understand all of the options for insurance coverage.

Term Life Insurance

A term life policy is just that – a policy that lasts for a certain time period, called the term. Term life insurance is a policy with a specific end date. As long as you pay the monthly premium, your policy will remain in effect until you reach the policy end date.

Common terms include 10, 15, 20, and 30-year life insurance policies. When the end of the term is reached, you may or may not have the ability to renew, depending on the company, your health, and other factors. If you are able to renew your insurance policy, the premium will typically be higher because the policy will extend through older age.

Term life insurance is more affordable than a whole life insurance policy and is a popular option because of the low cost 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.

Pros and Cons of Term Life:

  • Lower premiums. Term life insurance is usually the least expensive policy.
  • Full payout. Another advantage is the beneficiary will receive the full amount of the policy if you die within the term.
  • Term limit for policy. Term life insurance policies are just that – for a set duration of time, often ranging from 5-30 years. The positive aspect of the term limits is knowing how much your policy rates cost. The downside is you may not be able to renew, and even if you do renew once the term is up, the cost will most likely increase.
  • No cash value. Another downside is, unlike whole life insurance, you won’t build up cash you can borrow against down the road.

Whole Life Insurance

Whole 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.

Also known as permanent life insurance, or cash value life insurance, whole life insurance premiums will never increase because you age.

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.

Disadvantages of whole life insurance.

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 a term life policy and investing the monthly difference in a mutual fund or other investment.

Pros and Cons of Whole Life:

  • Stable premiums. One of the biggest pros to whole life insurance is you’ll never see an increase in your premium. What you pay today is what you’ll pay 20 or 30 years from now. And as long as you continue to pay your premiums, your beneficiary will receive the benefits upon your death.
  • Cash value. Whole life insurance also has a cash value. You gain interest as the cash value increases. Interest growth is tax deferred, meaning you don’t pay taxes on the income while it remains in your policy. If you cash out your whole life policy you will pay taxes for any cash amount above what you put in.
  • Higher premiums. One downside to whole life insurance is the premium is usually higher than term life insurance, and can stop a lot of people from getting life insurance.

What About Life Insurance as an Investment?

Some people claim whole life insurance is a better option than term life insurance because it has cash value and can serve as an “investment.” In most cases, whole life insurance is not a good investment, despite what some people may tell you. But there are a few scenarios where it makes sense.

These are the two main types of insurance coverage you can choose between, but inside of these two types, there are several other variations where each has different benefits. For example:

  • Universal
  • Variable
  • Indexed
  • Survivorship

There is no “one-plan-fits-all” which will work for every applicant. You will need to explore all of the options and weigh them based on your life insurance preferences. Regardless of which type of plan you choose, it’s important you give your family the coverage they will need. Having a less-than-perfect plan is much better than having no life insurance coverage at all.

Getting Affordable Life Insurance Coverage

Regardless of which type of life insurance you choose, either whole or term, it’s important you get the cheapest premiums available. There are several ways you can get affordable insurance premiums. Making a few changes could save you hundreds of dollars on your insurance coverage.

The first thing you should do is cut out any tobacco you currently use.

If you’re listed as a chewing tobacco user or a smoker on your application, then you should prepare to see much higher monthly fees for your insurance protection. In fact, smokers are going to pay, at minimum, twice as much for life insurance versus what a non-smoker would for the same-sized plan. If you want to save money, it’s time to kick those cigarettes, once and for all.

The next thing you should do is improve your overall health.

Before the insurance company accepts your application, they are going to require you to take a medical exam to determine how much of a risk you are to insure. The better your health, the better your insurance premiums are going to be.

If you want to save money, it’s time to start going to the gym and skipping the extra dessert. A healthy diet and regular exercise are both excellent ways for you to lose weight, lower your cholesterol, and reduce your risk of being diagnosed with severe health complications. Lacing up those running shoes could cut your insurance premiums in half, which means more money in your pockets.

The best way to ensure you’re getting the lowest premiums is to get lots of insurance quotes before you decide which one is going to work best for you. Every insurance company is different, which means you could get drastically varying rates depending on which company you get the quote from.

Getting several quotes will ensure you’re not paying more for insurance coverage than you have to! You wouldn’t buy a car without test driving a few first, would you?

Instead of wasting your time calling dozens of companies yourself, let one of our independent insurance agents do all of the hard work for you. Unlike traditional agents, we work with dozens of highly rated companies across the nation, which means we can bring all of the lowest insurance premiums directly to you, without the hassle of having to call the companies yourself. Working with an independent insurance agent can save you both time and money on your life insurance search.

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 that is most suitable for your needs and will offer the best financial protection for your family.

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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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