Term or Whole Life Insurance – Tough Question
Life insurance has been around for ages. However, their popularity doesn’t make them any easier to understand when choosing between term or whole life insurance.
By definition, life insurance is a contract made between an insurer and the insured. If the insured passes away while still under contract, the death benefit is paid to the named beneficiaries. Sounds easy enough, right? Well, it starts to get confusing when you have to find out the right type of insurance for your specific needs.
In general, there are two types of life insurance; term life or whole life insurance. They are defined by the same principle where monthly payments are made over time. And, in the event of death, your beneficiaries will receive a death benefit.
However, there are some major differences between the two. We’ll break each one down so you can make a more informed decision between the age-old question, term or whole life insurance?
Let’s start with the basics.
The objective of life insurance
Before you purchase life insurance, you must view it as financial protection in the event of your death. The greatest advantage of having life insurance is the certainty that your family can maintain the same lifestyle.
For many us, death isn’t exactly a topic that’s super exciting to discuss. But, when thinking about the future, it’ something you just can’t ignore. Since death is inevitable and unpredictable, a lot of times it makes sense to have some form of a life insurance in place. Trust me, your loved ones will thank you.
Every day we have to deal with lots of issues, especially when thinking of long-term plans. Having a life insurance policy in place will give you the peace of mind. So, even if the worst were to happen you have a plan all ready to go.
The great thing is that life insurance policies can be tailored to fit just about any budget. For most people, the thought of an insurance policy instantly becomes a bit overwhelming and costly. However, with life insurance today, there are many choices to choose from so anyone can be covered regardless of income and budget.
Having a life insurance policy in place is a key factor in your overall financial plan. While thinking about your retirement is important, it’s vital you consider what would happen if you unexpectedly passed away.
A life insurance policy can be a key piece in a comprehensive financial plan. It allows you to go about your daily activities with more confidence and peace of mind. Now we just have to figure out whether term or whole life insurance is the right choice for you.
What is Term Life Insurance
Term life insurance has been defined as pure coverage. It follows a simple model where you pay premiums over a number of years. And, in case of death during this term, your beneficiaries will receive the death benefit on the policy.
This life insurance, as the name suggests, is limited to the term of the policy. There is no other value added and what your beneficiary receives in the event of your death is the face value of the policy, tax-free.
No extra complications are involved with term life insurance, making it straightforward and easy to understand.
Pros of Term Life Insurance
- If you are after simplicity and need the cheapest form of life insurance, then term is the right choice for you. And, in my opinion, term insurance is the correct form of life insurance for most people.
- It allows you to pay premiums for a specific number of years while minimizing risks to your family. This policy will save you from regularly having to go back to the drawing board to calculate new rates. Because, for most term life insurance policies, the premium remains constant over the term that is chosen.
- It’s extremely affordable. Plain and simple, term life insurance is the cheapest type out there. The low and fixed premiums are going to be much less than the alternative of whole life insurance.
- It covers the exact needs for your income replacement. By choosing the specific number of years over which you want your family covered, you can tailor your policy to match exactly what you need. These needs could include the cost that goes towards childcare, paying off the mortgage and simply allowing your family to maintain the same lifestyle.
- It can be used to acquire whole life insurance when you’re older. If you are thinking about whole life insurance, but you only have so much in the budget, then term life is a step in the right direction. All insurance providers have the option of converting term life to a permanent/whole life one. Always make sure to inquire about the window period for conversion and the risks involved.
Cons of Term Life Insurance
- It is specific to the face value only. Term life insurance is specific on what it covers which is your life over an agreed upon time period. In the event you survive the period, the policy expires and that’s it. You don’t receive any of your premiums back when the term expires unless you have some type of return of premium policy – which will be more expensive than a basic term policy.
- The older you are the more expensive it will be to purchase. Term life insurance is greatly affected by age. The older you are, the more expensive it’s going to be. This is because of the higher risk factors the insurance company assumes since, of course, the older you get the lower your life expectancy.
- For extended coverage, the terms must be renewed. If you took out 10-year term policy and you want an extra 10 years added to the coverage, you’ll have to purchase a new policy. This means your premium will be determined at your new age – which means you’ll have a higher premium.
- In most cases when you fail to pay the premiums, the policy is automatically canceled after a grace period. Term life insurance is only effective as long as you pay the premiums. So, if you stop paying premiums after the grace period has completed, the policy will be canceled.
That should give you a pretty good idea of the basics of term life insurance. It’s pretty straightforward. Now, let’s take a look at whole life insurance (aka permanent life insurance) where things can start to get a little more complicated.
What is Whole Life Insurance
Whole life insurance is a type of permanent life insurance. It remains in effect as long as you continue to pay the premiums or there is enough cash value to pay the premiums automatically. Different from term, whole life is not limited by time but instead remains effective up to the time of the death of the policyholder. Permanent coverage – as long as the premiums are paid – is a major motivator as to why many people go for this type of policy. You don’t have to come up with a new plan after a number of years – like a term policy – if coverage is still needed.
The long-term and permanent appeal of whole life insurance can make it a nice safety net. There are a few different types including variable universal life, traditional whole life, and universal life amongst others. While all of them cover your entire life period, there are unique elements that make each one different from the other – and can be quite confusing in some cases.
Compared to term life insurance, whole life is more complicated in how premiums are paid along with the addition of cash value. In its simplest form, whole life consists of life insurance as well as a savings component known as cash value. Now, it’s time to determine whether term life or whole life insurance is right for you.
Pros of Whole Life Insurance
- It caters to long-term needs. Whole life insurance is known as permanent coverage as it does not expire like a term policy. Once you sign up for the coverage, all you have to do is pay the premium and follow the insurance companies terms and conditions. Regardless of whether you pass away at 30 or 100, your beneficiary will receive the death benefit.
- There is more than just a death benefit with whole life insurance. As we’ve mentioned previously, there is a cash value component that can accumulate interest. In essence, this gives you more value than just a term life insurance policy. The extra benefit of having cash value accumulate gives you the advantage of tax-deferred savings.
- Your cash value could be withdrawn or borrowed against. Basically, the money can be used for anything but you need to be aware of the best withdrawal strategy for your situation because of tax consequences.
- It can be great for estate planning. For a long time, life insurance has played a vital role in a well-executed estate planning strategy. It can be used as a protective seal in the event of death if taxes are owed.
- It makes more sense if you want coverage for your entire life. The non-fixed nature provides a link of continuity where you don’t have to worry about a term running out.
Cons of Whole Life Insurance
- It’s typically much more expensive when compared to term. A comparison will show a quite a difference in premiums between term life and whole life insurance. This is because of the life insurance and a savings component of whole life.
- Whole life insurance can be more complicated since there are so many choices and regulations. From universal life to indexed universal life to variable universal life, the choices can be overwhelming. And, once you do choose one, you then have to figure out everything else. This includes how the cash value works, what the surrender charges are, are there guaranteed rates, etc. As you can see, it can be a lot when compared to a simple term policy.
- It typically requires years of continuous premium payments for the cash value to be of a significant amount. The extra benefits of whole life insurance, which basically make it a forced saving machine, requires plenty of patience.
- On average, the interest rats the policyholder receives on the savings component might be less and more expensive when compared to other investments. Whole life insurance is not a standalone model that will protect your family after death while also giving you the best rate of return. The cash value is simply a financial advantage that can come in handy when no other sources are available.
Things that can Make Term or Whole Life Insurance More Expensive
Before you settle on a term or whole life insurance policy, you must understand your own situation to determine how much you’ll pay in premiums. Factors include your age, job, health status, the value of assets, etc.
All of these, plus the future needs of your family, should lead you to make the right choice between term and whole life insurance.
An extra plus would be to consult with an insurance professional. Ask the tough questions to ensure you find the right policy to suit your specific needs. Also, be aware that insurers use different methods to calculate the premiums charged for a policy.
If you are in poor health, have a family record of medical complications or use tobacco, then you’re going to have a higher premium. This may play a significant factor when choosing between term or whole life insurance
So, Is Term or Whole Life Insurance Right For You?
Now that you have a breakdown of both types, it’s now time to make the decision between the two. The choice firmly lies in the plans you have and which of the options is better suited to cater to your specific needs and budget.
Regardless of what type of policy you choose, don’t be pressured into one because someone is pushing it on you. For by far the majority of Americans, a simple cheap term life insurance policy is all you need. If your financial situation is more complicated, then some type of whole life policy might also make sense in addition to a term.
Most importantly, though, you’re not purchasing this policy for your benefit. Life insurance is for your family to make sure they can maintain the same lifestyle if, god forbid, you were no longer around.
I am potentially interested in a term policy for $250,000 for my husband who is in excellent health but has an ICD that has never been needed.