Term Life Insurance vs. Whole Life Insurance

Guest Post by Jason Fisher

Life is filled with the unexpected. When you buy life insurance, you can rest assured knowing your loved ones are protected no matter what happens. While most people agree they need life insurance, there is an age-old debate about which type of policy is best: term life or whole life.

Although the concept of permanent life insurance is appealing, is it worth the cost? And do the benefits of term life insurance make it the best choice for everyone. To decide whether term or whole life insurance is right for you, you need to identify your needs and understand some key differences between the two policies.

What is term life insurance?

Let’s start by breaking down term life insurance. Term life insurance offers coverage for a certain period, or term, of life. These policies come in terms like 5, 10, 15, 20, and 30 years.

If you’ve faithfully made payments and pass away during the term, your beneficiaries will receive the death benefit, or face value, of your policy. Your premiums and the face value are locked in for whatever duration you choose. Once your term is up, though, rates on a new term policy may change based on your age and other risk factors.

Key considerations for term life insurance

• Cost — You can purchase large term policies with considerably lower premiums than whole life policies of the same value, saving tens of thousands of dollars over your lifetime.
• Flexibility — Term life insurance is designed with life’s changes in mind. It’s made to cover your temporary needs, allowing you to save money and tailor a policy to your current circumstances.
• Simplicity — Term life insurance policies are uncomplicated. As long as you pay your premiums, the policy will stay in effect for the length of the term.
• Temporary policy — The only true downside to term life insurance is its lack of permanence. Term life insurance is intended to meet your temporary needs and ensure your loved ones have protection when they rely on it most.
• Conversion — Keep in mind that if you find you need long-term life insurance later in life, you can sometimes convert your term life insurance into a universal or whole life policy.

When to buy term life insurance

Here are a few situations when term life insurance is a good fit:

• College education — If you’re looking to secure your 6-year-old’s future college education, a 15-year term life policy could do the trick.
• Mortgage — If you and your spouse are knee-deep in a 30-year mortgage, a term life policy could ensure your family’s home is paid for.
• Debt — If you’ve accrued debt which could be transferred to your loved ones, you could purchase a term life policy for the length of time it will take to pay them off.
• Income replacement — If you have dependent children or want to see your spouse through to retirement, a term life policy can replace your income.
• Budget — If your long-term goal is to secure whole life insurance but you’re on a budget, term life insurance provides you with an affordable solution which you can convert to a whole life policy later.

Whatever your situation, you can base the terms of temporary life insurance around your family’s ever-changing financial needs.

What is whole life insurance?

Unlike term life insurance, whole life insurance is permanent. True to its name, whole life insurance is designed to provide protection for the entirety of your life, rather than a specific period.

In addition to the length of coverage, there is another key difference between term and whole life insurance: cash value. Whole life insurance is considerably more expensive than term life insurance, because it offers more than just a death benefit your loved ones will receive in the wake of your passing.

Your premiums also go towards the policy’s cash value, which grows tax-deferred over the years. You can also borrow money from the cash value, much like a retirement account. Just keep in mind that you’ll have to repay the loan with interest to keep the full death benefit of your policy intact.

You are also entitled to the policy’s cash value if you ever have to surrender your policy.

Key considerations for whole life insurance

• Cost — Whole life policies are expensive. You could get more than double the amount of coverage with significantly lower premiums by opting for term life coverage. It’s crucial to keep the cost of life insurance policies in mind.
• Guaranteed cash value — The cash value comes with a guaranteed minimum growth rate. Whether or not life insurance is the most rewarding investment is debatable, but the policy does come with certainty.
• Death benefit — Your death benefit is guaranteed; however, it can be used to repay outstanding loans drawn from the policy’s cash value, decreasing the amount of money your beneficiaries receive.
• Level premiums — While premiums are considerably high, they’re guaranteed to stay the same for the duration of your life, a comfort to aging policyholders and individuals with declining health.

When to buy whole life insurance

Term life is a no-brainer for most families, but whole life insurance may be better suited to some people’s needs.

Consider whole life insurance for the following:

• Estate planning — If you’ll be leaving behind an estate of more than $11.4 million, your heirs will be responsible for estate taxes to the IRS. Whole life insurance can cover the cost.
• Additional investing — If you earn a high income and need life insurance, you might want to invest in a whole life policy, especially if you’ve maxed out your 401(k)s and Roth IRAs.
• Special needs — If your spouse, child, or other dependent will need lifelong care due to special needs, a whole life insurance policy could secure their well-being after you’re gone.

The bottom line

As you can see, there’s no one-size-fits-all solution to life insurance. While the benefits of term life insurance make it the best fit for most people, everyone’s situation, financial needs, and goals are different. Sometimes, people need the permanence of whole life insurance.

Whatever type of life insurance you decide on, don’t delay making this all-important purchase. Life insurance is one of the most concrete ways you can protect your family, and there’s no time like the present to get a policy in place.

Jason Fisher is the founder and CEO of BestLifeRates.org, and a highly-trained life insurance agent licensed across the country. He has helped thousands of families find affordable life insurance, from basic plans up to comprehensive estate plans, and everything in between.