Term Life and Whole life
If trying to determine between term and permanent life seems a little confusing, you’re not alone. While most people know that having life insurance will pay a sum of money to their loved ones if they pass away, they may not be able to explain the differences and benefits of whole life insurance vs. term life insurance. If you want to protect your family’s financial future, it’s important to know the basics about these two options.
What are the differences of term life vs. whole life?
The largest difference between the 2 types of policies is that while both pay a benefit to your beneficiaries when you die, whole life also allows a permanent, lifelong coverage with a valuable “cash” component. This added value – along with the guarantee that the insurer will eventually have to pay a death benefit – this means that a whole life policy premium is going to be higher than for a term policy. Here are some of the other features and differences between the two types of policies:
Policy feature | Term life insurance | Whole life insurance |
Initial premium | Low | Typically, higher than term insurance |
Premium over time | May remain the same or increase over time | Guaranteed to remain the same |
Permanent coverage | No | Yes |
Length of coverage | Typically, 10-30 years. If you buy through work, coverage can be up to a termination age | Lifetime coverage (as long as payments are made) |
Health exam required | In most cases, but depends on the amount taken out | Yes |
Cash value | No | Yes – accumulates over time |
Eligible for company dividends | No | Yes – depending on the company |
Ability to withdraw cash value during life of the policy | No cash value | Yes – withdrawals and loans are allowed (but if unrepaid, this will diminish the death benefit) |
Guaranteed death benefit | Yes | Yes |
Used for estate planning | Not typically | Yes |
Accelerated death benefit | Yes | Yes |
What you should consider before you buy a whole or term-life policy
Everyone is unique, and your decision to buy a whole vs. a term policy should be guided by your unique situation in life, including, but not limited to things like:
- How old you are?
- How is your health?
- What are your family’s financial needs if you were to pass away?
- How old are your children?
- Do long-term health expenses and serious illness concern you?
- What is the balance of your mortgage and other debts?
- What do you plan for retirement?
- Do you have college plans for your children?
- Do you have funds for funeral expenses?
- Do estate planning and tax ramifications concern you?
- Will you have a trust as part of your estate?
- Do you want to donate part of your estate to charity?
- Do you currently have existing life insurance, maybe through your employer?
Even though there will be a big cost between a term policy and a whole life policy along the way, when you consider all the benefits that of having a whole life policy can provide over the your lifetime – and the certainty of payout – you may feel it’s a better overall value.