WHICH DO I NEED? TERM LIFE INSURANCE VS. WHOLE LIFE INSURANCE
“Purchasing life insurance is a big decision. Knowing the differences between term life vs. whole life insurance can help ensure you choose the right type of plan.”
The topic of life insurance isn’t always easy to talk about. It can be tough think about your own mortality, but life insurance isn’t a subject you should ignore or overlook.
Many people forego purchasing life insurance because of financial reasons. In fact, according to LIMRA, “people estimate life insurance to cost three times what it actually does.” For many people, life insurance simply isn’t a financial priority.
Even those with life insurance often don’t have enough coverage, leading to a coverage gap of $200,000, according to LIMRA.
What's a coverage gap?
The coverage gap is how much life insurance you need versus how much life insurance you own. Since life insurance is often meant to replace lost income from the death of a loved one, passing away during your prime working years can be especially difficult for your family to recover from.
But even people affected by the coverage gap are covered by something. Some insurance is always better than no insurance at all.
It’s important for any life insurance policy to cover the loss of your income in the event of your untimely death. The death benefit — the amount of money your beneficiary receives — should also be enough to pay off any major debts, bills and other financial obligations.
Making sure your family won’t be affected by a coverage gap after you pass away is important. Term life insurance and whole life insurance are two popular solutions that will provide you and your loved ones peace-of-mind after a tragic loss.
You’ve probably heard of these life insurance products before. Many people have a preference for one or the other, but each of these products serve a specific function depending on your circumstances and needs.
Let’s compare term vs. whole life insurance to determine when each is best for you to make sure you don’t experience that coverage gap.
Looking for something in particular? Skip to one of the sections below:
- What is term life insurance?
- What is whole life insurance?
- Should I buy term or whole life insurance?
- Term vs. whole life insurance chart.
WHAT IS TERM INSURANCE?
Term life insurance is pure life insurance, plain and simple.
Simple doesn’t mean bad when it comes to term life. Term life insurance covers you for a term, or length of time. Terms are usually 10 to 30 years based on the insurer and your specific situation and needs.
Term life insurance guarantees that your death benefit will be paid to your beneficiary - the person you assigned to receive the benefits - after your death.
That’s it. Simple, right?
As with most life insurance products, premiums for term life insurance are based on the following three things:
- The total coverage you want
- Your age at the time of purchase
- Your health at the time of purchase
You’ll generally need to health-qualify to purchase term life insurance. This means you’ll have to answer some questions about your health status. You may also need to undergo a simple medical exam.
Your health, along with your age and the amount of insurance you’re purchasing, helps to determine your insurability as well as your rate. For example, non-smokers almost always have less expensive premiums than tobacco users.
Buying term life insurance when you’re young and healthy means you can buy more coverage for a very reasonable cost. You can also buy a term of up to 30 years, with your premium remaining the same for the entire time you’re covered.
What can term life insurance be used for?
Term life insurance is an ideal solution for protecting your loved ones during your prime earning years. If you pass away during the term of your policy, your death benefit can be used to:
- Pay off your mortgage and any debts
- Replace the income loss from your death
- Set up a college fund for your children
A term life insurance policy is one of the easiest ways to ensure your family doesn’t fall into a coverage gap. That's becuase, purchasing enough coverage to pay off any large debts means your loved ones won’t experience undue financial hardship after you’ve passed away.
The biggest advantage of term life insurance is its affordability relative to its death benefit.
Using our quote tool, a 20-year $500,000 term life insurance policy would cost me, a healthy 27-year-old male, as little as $307 to $330 per year.
That’s less than a dollar a day!
Some insurers even offer a return-of-premiums rider — or addition — to term life insurance policies. For an added premium, this rider will refund you all the premiums you’ve paid into the policy over the years. Since you hope to outlive the term of your life insurance, this could be a worthy investment.
What are the pros and cons of term life insurance?
THE PROS AND CONS OF TERM LIFE INSURANCE
You may purchase a 10- to 30-year term
You may outlive the term of the policy
Guaranteed to pay out upon your death
Death benefit is tax-free to beneficiaries
You may outlive the policy
May be able to convert to a whole life policy at the end of the term
Death benefit could decrease
Premiums may increase
Provides a substantial death benefit for your beneficiaries
You may outlive the policy
Premiums are level, low and affordable through the initial term
Premiums are based on health, age and face value of death benefit at time of purchase and at renewal
Premiums may increase substantially upon renewal at the end of the initial term
May be possible to purchase a return-of-premiums rider
Not all insurers offer return-of-premiums riders
Riders may increase your premium
Can cover your major debts and expenses while you grow your income and savings
You should purchase a long enough term to allow you to pay off your major expenses if you die before the term expires
WHEN DOES IT MAKE SENSE TO PURCHASE TERM LIFE INSURANCE?
When you’re young, you’re likely not earning nearly as much as you would 10, 20, or 30 years down the road. You also probably have some fairly substantial debt. Mortgages, student loan balances and other bills all add up quickly.
If you pass away before you’ve had time to grow ample savings, how would your loved ones fare financially?
A substantial part of your family’s income would fade away while expenses would only decrease by roughly 20 percent, according to LIMRA.
Your family could also be on the hook for repaying some of your debts. For some private loans, your death may trigger a default in which your full balance is due immediately. If your spouse is a cosigner to such a loan, he or she would be responsible for this debt.
Term life insurance makes up for this loss of income and is intended to pay off any large outstanding debts.
Excellent times to purchase term insurance are:
- When you buy a new home. Term life insurance can pay off your mortgage in the event you pass away beforehand.
- When you get married. Recovering from the loss of half a family’s income is difficult. Term life insurance can ease that financial burden. Your death benefit can buy precious time for your loved ones to reassess their finances after they’ve had proper time to grieve.
- When you have substantial loans and debts. Credit card debt, student loans and car loans are all major sources of debt for families. Your term life policy can help your family pay off these hefty bills after you pass away.
HOW MUCH TERM LIFE INSURANCE SHOULD YOU BUY?
First, consider what your current and expected debts are. A mortgage, loans and other bills all add up. You should purchase a term life insurance policy that covers as much of these expenses as possible, relative to how much insurance you can afford.
Consider your near-future goals and plans, too.
Term life insurance can help establish a college fund for your children if you were to pass away before you can save for one yourself.
Lastly, consider your income.
Both parents are employed in 61 percent of families with children, according to 2016 data reported by the Bureau of Labor Statistics. What would change if your family were to suddenly lose half its income?
The amount of coverage that’s right for you depends, then, on affordability and what your intentions are for a specific amount of coverage. It’s worth buying as much coverage as possible when you’re young and healthy, as rates are based on age and health.
How long should your policy term be?
You also want to buy a policy with a term that matches your needs and goals. If you have a 15-year mortgage, a 15- or 20-year term life policy might make the most sense for you. It’s a good choice to buy a longer term the younger you are.
You may not qualify for as much coverage, if you qualify for any at all, later in life. Health problems can spring up, impacting your ability to health-qualify for insurance or making premiums more expensive at the very least.
You’re only healthy until you’re not, and you don’t want to realize the need for life insurance when it’s too late.
Once your policy nears the end of its term, you’ll have the option of renewing it based on the rates available to someone of your age at the time.
You may find that premiums have increased dramatically after the term, making renewal prohibitively expensive. Hopefully, by this point, you’ll have paid off most of your financial obligations. But you still need life insurance.
Luckily, most term life insurance policies are convertible into smaller whole life policies.
Let’s compare term vs. whole life insurance.
WHAT IS WHOLE LIFE INSURANCE?
Whole life insurance is life insurance that remains in effect for the entirety of your life. As long as you pay your premiums, your death benefit is guaranteed to be paid out no matter how long you own the policy.
Unlike term insurance, premiums for whole life insurance never increase because there’s no term. Premiums are dictated only by your age and health at the time of purchase and remain level forever.
Of course, because you’re guaranteed to use your whole life insurance, it’s more expensive compared to a term life policy with the same death benefit.
As with term policies, you must health-qualify for most whole life insurance policies.
While there are guaranteed-issue policies that ask just a few health questions — if at all — you should not buy guaranteed-issue policies if you can health-qualify for anything else.
Guaranteed-issue life insurance is intended for those who would not medically qualify for a fully-underwritten policy. Even those with terminal illnesses can purchase these policies. As a result, premiums are more expensive to mitigate the additional risk undertaken by an insurer.
Guaranteed-issue life insurance should be treated only as a last resort unless you have been diagnosed with a medical condition that will disqualify you from an underwritten policy.
What are the pros and cons of whole life insurance?
THE PROS AND CONS OF WHOLE LIFE INSURANCE
In force through your entire life
You must pay premiums to keep the policy in force
Provides a level death benefit and level premium for life
Premiums are based on health, age and face value of death benefit at time of purchase
Death benefit is tax-free to beneficiaries
Higher premiums for a lower death benefit compared to term life insurance
Guaranteed to pay out upon your death no matter how long you live
You must continue paying premiums until you pass away or the policy endows (you’ve paid premiums equal to the face value of the policy)
Riders can enhance your policy and benefits
Certain riders may increase your premiums
Builds tax-deferred cash value
Can borrow from your policy
Can surrender your policy for amount of cash value
Can purchase a paid-up policy
You may owe taxes on any cash withdrawn from cash value
Loans can reduce the face value of your death benefit if not repaid
Paid-up policies will have less death benefit than if you maintained the original policy
Best purchased for final expenses, establishing an estate or leaving a gift behind
Large death benefits are expensive vs. term life insurance
Riders: Add-Ons to Your Whole Life Policy
One big difference between term vs. whole life insurance is the added benefit of “riders” that are common with whole life policies.
Some riders are included by default, while others are optional and increase your premium.
Though not all insurers offer the same riders, an example of a usual rider is an accidental death rider. This rider will increase your death benefit if you pass away in an event ruled an accident by a medical examiner.
An accelerated death benefit is another rider that permits you access to a portion of your death benefit if you’re diagnosed with a terminal illness. This is particularly useful to help cover medical costs or travel associated with such a hardship.
There are many more riders available for whole life policies, depending on the insurer and your needs and desires.
Whole life insurance also differs from term life insurance in that whole life policies build cash value as you pay your premiums.
WHAT IS CASH VALUE?
Cash value is considered a living benefit of a whole life policy. As you pay your premiums, part of them is invested and grown over time. This growth is “tax-deferred,” meaning the gains aren’t taxed while they’re growing as part of the cash value of your policy.
So how’s that benefit you?
Cash value allows you to borrow from or take a loan against your policy. This added cash can come in handy if you unexpectedly lose your job and need some money while you get back on your feet, for instance.
Like typical loans, however, some insurers will charge interest on any money you borrow from your policy. While you don’t have to pay these loans back, choosing not to do so will reduce the death benefit of your policy.
For example, if you take out a $5,000 loan on a $20,000 whole life policy and decide not to pay it back, your death benefit will be reduced to $15,000, minus interest owed on the loan.
"Hacking" Your Policy Using Cash Value
The cash value aspect of a whole life insurance policy also allows you the opportunity to “surrender” your policy. Surrendering your policy means you can terminate your policy in exchange for the cash value you’ve accumulated over time.
You can also use your accumulated cash value to purchase a paid-up policy. A paid-up policy buys however much insurance your cash value affords. This removes the need to pay premiums while still keeping you insured.
Paid-up policies are particularly useful for people who find it difficult to pay their monthly or annual premiums, but still see the very real need for insurance.
A paid-up policy won’t purchase as much insurance as with your current policy, but some insurance is always better than none.
Some whole life policies will also earn dividends. Dividends are calculated when an insurer has a surplus, or extra, funds available. They may be paid out to you in cash, or you can decide to deposit dividends and allow them to gain interest. You may also be able to apply dividends to your policy to reduce your premium.
SHOULD YOU BUY TERM OR WHOLE LIFE INSURANCE?
After comparing term vs. whole life insurance, you might think that whole life is the best option for you. It lasts your entire life and the premiums never increase. As long as you continue paying the premiums, your policy will never expire.
So why is term life insurance usually the better choice?
Term life insurance provides more life insurance for lower premiums than a comparable whole life policy. That's because there’s a low risk of you actually dying during the term. If you do pass away earlier than expected, though, you know your family has ample coverage.
During your prime working years, you’re probably focused on earning more and building your savings. You also probably have substantial debts that you’re slowly paying off.
If you were to pass during these years, term life insurance is the best option to pay off debts and replace your income long enough for your family to recover from tragedy.
At the end of your policy term, your income should have grown large enough to allow you to not only pay down your debts but contribute to savings. If so, you’ll no longer need as much insurance.
What do you do if your term life insurance becomes unaffordable?
Term life insurance often becomes too expensive at the end of its term, too. You might find that the premiums for renewing your policy after your initial term have increased dramatically from when you first purchased the policy 15, 20, or even 30 years ago.
That’s when a whole life insurance policy makes sense. Even though your major debts are taken care of through years of hard work and planning, you still need to consider final expenses and beyond.
It’s important to consider what effect your death could have on your family’s finances, even after your retirement. Your spouse may receive only half the usual income from social security after your death. This would severely impact his or her financial situation.
Since whole life insurance costs more than term insurance for the same death benefit, you’ll likely reduce the amount of coverage you purchase. This makes sense at an older age since you have less need for a large policy.
Whole life insurance is a great way to:
- Cover final expenses
- Pay off any small remaining debts
- Leave a gift behind for your loved ones
You can also use whole life insurance to establish an estate or set up a college fund for a family member.
A RECAP ON THE DIFFERENCES BETWEEN TERM & WHOLE LIFE
TERM LIFE VS. WHOLE LIFE INSURANCE
Level until end of term; can increase substantially at renewal (based on age, health)
Level throughout duration; based on initial age and health at original time of purchase
A large death benefit is affordable at a young age
Large death benefits are more expensive than with a term policy
Policy expires at end of term; guaranteed payout only if you die during term of policy
Policy is in effect as long as premiums are paid
Builds cash value?
Yes; premiums grow cash value, allowing you to take out loans, surrender the policy for cash or purchase a paid-up policy
Lowest premiums for high death benefits
Higher premiums for the same death benefit as a term policy
May be able to renew policy at the end of your term, as long as you health-qualify; may be able to convert to a whole life policy
Premiums paid build cash value; riders can enhance your policy with further benefits
MAKING THE RIGHT CHOICE
Ultimately, you always want to make sure you’re covered by a life insurance policy that makes sense for you. It needs to be affordable and have enough coverage to give you and your family peace-of-mind.
The best course of action is to be covered by term life insurance during your prime earning years. After you pay down your debts and build your assets, whole life insurance can cover final expenses and leave a final gift for your loved ones.
Ensurem provides you with the resources to compare term life insurance and whole life insurance. This is necessary to determine which is best for your particular situation. No one understands your needs better than yourself.
We aim to give you the resources to make an informed decision about what makes the most sense for you.
Of course, our licensed agents are always willing to answer any additional questions you may have.
Always remember: some life insurance is always better than no life insurance. Owning an affordable policy will offset some of the heavy financial burden imposed on your loved ones after you pass. It will also serve as a great reminder of your devotion and care for them.