Life is uncertain and unpredictable. The constant ups and downs can catch us off guard, throw our planning out of the window, and make us feel completely unprepared in moments of tragedies and calamities. The sudden accidental death of a family's bread earner can leave the survivors in immense financial strain. Along with the difficulty of meeting their everyday expenses, they may have to repay loans that the deceased left behind.
A life insurance policy can be a way out in this case. After the policyholder’s death, the beneficiaries (usually the deceased person’s family members) can make a life insurance policy claim to receive immediate financial support. There are a few types of life insurance policies, each including a specific set of coverages. However, we will be focusing primarily on whole life insurance and term life insurance in this article.
Whole life insurance offers lifetime coverage and also provides the support that you need during retirement. The term life coverage period is shorter; however, it is simpler to apply for and cheaper. In this term vs. whole life insurance article, we will discuss in detail the differences and similarities between these two types of coverages and help you decide which insurance policy is right for you. After informing yourself, it will be a breeze to find the best life insurance company for you.
The last section of the article focuses on frequently asked questions to help you navigate through the challenging maze of life insurance policies.
Term life insurance is life insurance purchased for a specific number of years. It can be bought for a period of 5–40 years.
The aim of this insurance policy is that in case the policyholder dies while his or her term life insurance policy is valid, the beneficiaries will be provided with the death benefit, a pre-decided monetary adjustment. If the policyholder outlives the stated term of his or her term life insurance, the policy can be renewed for another term or changed to a permanent coverage plan.
Term life insurance is a risk management practice and does not have any investment component attached to it. The monthly or annual premiums are determined by taking into consideration the applicant’s age, health, and life expectancy.
There are two categories of term life insurance policies: express term life insurance and traditional term life insurance.
In the express term life insurance, the applicant can skip the underwriting process that involves a full medical check-up to assess the person’s health and life expectancy. Even though the maximum payout for this insurance coverage is $250,000, it is still valid for 5 to 30 years, during which the cost of premiums remains unchanged. Another disadvantage of express term life insurance is that you can only renew it. You cannot convert it into a permanent policy once the term expires.
On the other hand, traditional term life insurance requires a thorough medical examination and offers coverage for up to $65 million. Moreover, you can easily convert it to a permanent life insurance plan after the end of the term.
The term life insurance policy is a risk management plan that provides coverage to the stated beneficiaries after the policyholder’s death. The policy is only valid for a specific number of years.
For example, suppose a 40-year-old applicant whose wife and children are dependent on him decides to purchase a 20-year term life insurance coverage for the financial security of his family. In case he dies within the next 20 years, his family will receive a death benefit according to his policy type to help them live a comfortable life.
No, a term life insurance policy does not have a cash value, which means you cannot use it for investment. You will not get additional interest or benefits upon the withdrawal or cancellation of your term life insurance.
The term life insurance policy provides coverage for all stated beneficiaries after your death, e.g., your spouse, children, or elderly parents. It also covers the immediate costs associated with your death, such as hospital bills, funeral, burial, loan repayments, etc. The beneficiaries can claim the death benefit as an entire sum or in the form of small monthly or yearly payouts.
The ideal candidate for term life insurance is someone in his or her 20’s, 30’s, or early 40’s, has good health, and can pay the premiums that average $60 per month.
A whole life insurance policy offers lifetime coverage for the policyholder. It is the simplest form of permanent life insurance that offers cash value and can be used as an investment option for the future.
Due to lifetime coverage of whole life insurance, the premiums are usually 10–15 times higher than those of term life insurance. However, you can still save money on renewal and other additional costs. Firstly, there is no need to renew whole life insurance as you are covered for life. Secondly, the cost of premiums remains fixed, so you can rest assured that even after 20 years, you will be paying the same monthly premium as you did at the time of purchase.
It is a kind of life insurance policy that provides lifetime coverage and financial security for the policyholder. After the death of the policyholder, the beneficiaries get a death benefit, which can be as high as $65 million, depending on the cost of monthly premiums, the coverage plan, and the profile of the policyholder. Beneficiaries can use this death benefit to cover their everyday expenses, educational costs, property mortgages, medical bills, etc.
There are several types of whole life insurance, and each provides a specific kind of coverage to the applicants. Most life insurance providers offer the following types of whole life insurance:
According to the Forbes’ Best Whole Life Insurance Companies May 2021 listings, the following companies have the best whole life insurance policies:
You can get whole life insurance quotes directly from the official websites or offices of the life insurance companies and independent providers. Alternatively, you can compare the quotes online using such portals as NerdWallet, Insurify, Policy Genius, and Net Quote. However, it is best to reach the insurer directly by phone or email because online comparison portals don’t always show the updated quotes.
The whole life insurance cash value is the investment or savings option offered to you during a whole life insurance policy purchase. It means that when you pay monthly premiums, the insurance company gives you an additional percentage of interest. So, if the insurer offers interest at the 5% mark and your monthly premiums are $250, you will receive $262.5 because of a 5% profit of $250.
Suppose after 20 years, you decide to withdraw cash from this whole life insurance policy. You will get a lot more money than what you actually invested because of the cash value feature.
An ideal candidate for whole life insurance is someone who:
The following table highlights the features of term and whole life insurance policies.
|Features||Term Insurance||Whole Life Insurance|
|Type of Coverage||Coverage and protection for up to 40 years||Lifetime coverage and financial protection|
|Coverage Amount||$50,000–$65 million||$10,000–$65 million|
|Tax Exemption on Death Benefit||Yes||Yes|
|Premiums||Low premiums||High premiums|
|Ending a Policy||Stop paying the premiums or contact your insurer||Discuss the best cancellation options with your insurer|
The table below shows an estimated cost of a 10-year term and whole life insurance for a $500,000 policy. These are monthly premiums for healthy non-smoking men and women aged 30, 40, and 50. The final price depends on individual factors and might differ from the following quotes. (Source: Quotacy)
|Person Covered||10-Year Term Life Insurance||Whole Life Insurance|
|Male, age 30||$16.87||$510.66|
|Female, age 30||$11.95||$447.54|
|Male, age 40||$24.94||$741.60|
|Female, age 40||$18.49||$642.60|
|Male, age 50||$47.64||$1,128.19|
|Female, age 50||$37.19||$960.43|
Whole life insurance is not an ideal investment option for long-term savings because the cash value is quite low and can take a very long time to build. This insurance policy is suitable for those who have the financial capacity to pay high premiums, want to diversify their investment options, and are interested in having lifetime coverage. If you’re looking for a better life insurance option, you should look into universal life insurance.
Canceling a term insurance policy is very easy because the policy is valid only for a specific number of years. In fact, in most cases, you just have to stop paying your monthly premiums and write a letter to the insurance company regarding the cancelation. If you cancel your policy in the middle of the payment cycle, the insurer might refund your last premium. Otherwise, don’t expect to get any money back.
In the case of whole life insurance, you have to surrender your policy. The insurer will give you the option to modify your coverage plan if you are unhappy with the current one. However, if you are sure about surrendering your policy, you will be required to submit the necessary paperwork, after which you will receive a lump sum from your insurance provider. Note that you’ll only be able to get the payment if you have had a policy for a long time to build enough cash value.
The average life insurance premium for whole life insurance is generally 10–15 times higher than the cost of term insurance premiums. It means that if the monthly premium for your term insurance is $40, the whole life insurance premium will be $400 or more. Such difference in pricing is due to the fixed cost of premiums for whole life insurance and its lifetime coverage.
Life insurance falls under the category of personal expenses; therefore, tax deductions do not apply to your life insurance premiums. But you will be asked to pay taxes if the policy has been purchased through your company and your company is a beneficiary of the life insurance policy. There is also a tax exemption on death benefits, and beneficiaries can expect to get the stated amount in the official payout cheque.
It is possible to convert most term life insurance policies to permanent life insurance policies after the expiry of the specified term. It means that if you have purchased your term insurance for a period of 20 years and outlived your policy, then after 20 years, you can renew it for another 20 years. Alternatively, you can switch to a permanent life insurance policy such as whole life insurance.
What is a conversion option on term life insurance?
Your term life insurance can be converted to a permanent life insurance policy of your choice after your policy reaches its expiry date.
You can convert your policy using your current age, in which case you will have to undergo a medical examination. Also, the cost of premiums will be much higher this time. Alternatively, you can use the same age bracket used to apply for the term insurance policy. In this case, you’ll have to repay all the premiums and applicable interest. However, the overall cost of your insurance policy will be much lower because you are applying as a young, mentally and physically sound applicant with an increased life expectancy.
Can I change a term life insurance policy?
Yes, you can change your term life insurance policy after the expiry date.
How can I change term life insurance?
Your insurance provider will call you when your insurance is about to expire to discuss your conversion options. It is to be noted that express term insurance cannot be converted to permanent life insurance.
Can I have two term life insurance policies?
There is no limit on the number of term life insurance policies that a person can have. You can purchase two or more term life insurance at the same time, given that you can afford to pay premiums for all of them on time.
Can I change my life insurance policy?
Usually, you cannot change your life insurance policy after signing the form and assigning the beneficiaries. But in some cases, the company allows you to switch from one whole life insurance coverage to another after completing the first 10 years as a policyholder. It is best to discuss these matters with your insurance provider.
Can I transfer my term life insurance policy to another company?
Term insurance policies are non-transferable. Every company provides different terms and conditions for the life insurance policies they offer to their customers. That’s why it is not possible to avail the same benefits and coverage under another company’s term life insurance. Having said that, if you are not satisfied with your current term life insurance provider, you can cancel your current policy and buy a new one from another insurer.
There are several other life insurance options that you can choose from. Most of them offer high payouts and good investment opportunities.
It pays interest based on the market rates (similar to the interest rates on mortgages).
They provide you with direct investment access to the stock market.
It uses stock index movement to determine what interest to pay.
When choosing a life insurance policy, you must ask yourself the following questions:
Both life insurance policies have been designed for different categories of people with their specific sets of needs. Term insurance may be perfect for a young bread earner looking for some safety net for his family members if he or she falls ill or dies suddenly. However, it may be a terrible idea for a 60-year-old because of the high premium costs. Therefore, we have summarized the benefits and downsides of both term life and whole life insurance in our term vs. whole life insurance article.
Whole life insurance can be a bad idea for those who do not need lifelong coverage and have other insurance options in place, such as their retirement funds and pensions.
The term life insurance can be renewed or converted to a permanent life insurance policy at the end of the term. You should figure out what option works best for you. However, keep in mind that the renewal costs can be higher because of your current age.
Are you looking for ways to diversify your investments? Can you afford to pay high monthly premiums? If your answer is yes, then converting to a whole life insurance policy is an excellent option for you. You will obtain lifetime coverage and financial protection and won’t have to worry about frequent increases in the premiums.
With a special needs child, whole life insurance is the best option for you, as you’ll be able to benefit from the claims and spend them on your child’s health and safety. Whole life insurance policies can also be customized or bundled to ensure that you have access to medical coverage in case your child’s condition deteriorates.
A death benefit is a payout that a beneficiary receives upon the death of the policyholder. The sum varies and can range anywhere from $10,000 to $65 million. The following factors influence the amount of the death benefit: Type of insurance policy The level of coverage The profile of the policyholder The circumstances of policyholder’s death
Cash value is the additional profit that life insurance policyholders receive on their paid premiums once they cancel the policy and withdraw their investments.
Whole life insurance is more pricey than term insurance because it provides lifetime coverage to the policyholders. Note that term life insurance premiums are subjected to increase with passing years. The older you become, the higher your monthly premiums will be. However, that’s not the case with whole life insurance since the premiums are fixed.
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