Term vs. Whole Life Insurance
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 Explained
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.
Benefits of Buying Term Life Insurance:
- It offers affordable monthly/annual premiums.
- It’s easy to understand.
- There are no hidden conditions.
- There are income tax benefits available.
- With additional protection, it provides coverage for critical illness.
- There is an accidental death benefit available.
- It is possible to convert to a permanent coverage plan.
Downsides of Getting Term Life Insurance:
- The insurance lasts for a limited number of years.
- The renewal costs are high.
- Premiums are high for people over 50 years of age.
- It does not have a cash value and investment component.
- The terms and conditions cannot be changed.
- It has a low claim rate — only 1% of the term life policies are actually converted to death benefits.
- It gives you uncertainty — you could find yourself as an uninsured 60-year-old after the expiration of your term life insurance. By then, it would be difficult and costly for you to renew it.
Express Term vs. Traditional Term Life Insurance
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.
Common Questions About Term Life Insurance
- What is a term life insurance policy?
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.
- Does term life insurance have a cash value?
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.
- What does a term life insurance policy provide?
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.
- What is the profile of an ideal candidate for term insurance?
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.
Term Life Insurance Pros and Cons
- The premiums are affordable for young policyholders.
- It is a good risk management plan.
- It financially secures the beneficiaries.
- It can be renewed or converted to a permanent policy after the expiry date.
- The policy can be canceled anytime.
- It has no cash value, hence cannot be used as an investment option.
- Renewal costs can be very high.
- Premiums are high for policyholders who are over 50 years of age.
- The policy cannot be changed after signing on the dotted line.
- The cost of premiums increases with time.
Whole Life Insurance Explained
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.
Benefits of Buying Whole Life Insurance:
- It provides lifetime coverage and financial protection.
- It has a cash value. The policyholder will receive more than he or she paid upon withdrawal, cancellation, or as a payout.
- The cost of premiums is fixed.
- There are tax exemptions on the death benefit.
- Dividends used to pay the premiums are available for some policies.
- It saves one from the hassle and costs of renewing the policy.
Downsides of Getting Whole Life Insurance:
- The premiums are 10–15 times higher compared to term life insurance.
- The policy is fixed — you cannot change the stated terms and conditions or the beneficiaries.
- Failure to pay premiums on time can lead to high interest rates.
- It is not the best option for investment due to its low cash value.
- It is not suitable for young professionals with dependents.
Common Questions About Whole Life Insurance
- What is the whole life insurance?
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.
- What are the types of whole life insurance?
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:
- Non-participating whole life
- Participating whole life
- Level premium whole life
- Limited payment whole life
- Single premium whole life
- Indeterminate premium whole life
- Whole life economic
- What is the best 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:
- AXA Equitable – 5 stars
- Northwestern Mutual – 5 stars
- Ohio National – 4.5 stars
- Guardian – 3.5 stars
- Massachusetts Mutual – 3 stars
- Where can I get whole life insurance quotes?
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.
- What is a whole life insurance cash value?
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.
- What is the profile of an ideal candidate for whole life insurance?
An ideal candidate for whole life insurance is someone who:
- Looks for ways to diversify his or her investments
- Wants to provide financial security for his or her family
- Is mentally fit
- Is physically fit
- Can afford to pay high monthly premiums
Whole Life Insurance Pros and Cons:
- It offers lifetime coverage and financial security.
- Monthly premiums remain the same throughout the policy validity.
- It includes an investment component (cash value).
- There are several types of coverages to choose from depending on individual or family needs.
- It can be canceled at any time.
- There is a tax exemption on death benefits.
- The monthly premiums are high.
- The policy is fixed — you cannot change the coverage or the beneficiaries.
- It can take a long time to build cash value because of the low profit margin.
- It is not a good investment option.
- The insurer can charge interest on late premium payments or loans.
Term vs. Whole Life Comparison
Term vs. Whole Life Insurance: Features Comparison
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|
Term vs. Whole Life Insurance: Price Comparison
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|
- Why is whole life insurance bad?
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.
- What are the requirements for canceling a life insurance policy?
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.
- What are the average life insurance premiums?
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.
- Are life insurance premiums tax-deductible?
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.
Can I Change My Mind and Switch?
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.
Other Life Insurance Options
There are several other life insurance options that you can choose from. Most of them offer high payouts and good investment opportunities.
- Universal life insurance
It pays interest based on the market rates (similar to the interest rates on mortgages).
- Variable life insurance and variable universal life insurance
They provide you with direct investment access to the stock market.
- Indexed universal life insurance
It uses stock index movement to determine what interest to pay.
Choosing Your Coverage
When choosing a life insurance policy, you must ask yourself the following questions:
- Are you looking for a risk management plan or an investment plan?
- How much premium can you pay per month?
- How many dependents do you have, and what are their financial needs?
- What kind of immediate expenses will your family have to bear in case they lose you suddenly?
- What is your current income, and how much growth do you see in the next 10 years? Will it be able to provide a retirement fund? Can it be replaced with the payouts that the insurance company is offering you?
- What are your current assets and savings? Will they be enough to provide for your family after your death?
- What other benefits or coverages are you looking for in your life insurance policy?
- Do you want lifetime coverage, or are you looking for short-term accidental coverage?
In Conclusion: Which Is Better: Term or Whole Life Insurance?
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.
Is whole life insurance a bad idea?
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.
What happens to term life insurance at the end of the term?
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.
Should I convert my term life policy to whole life?
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.
Should I buy term or whole life insurance if I have a special needs child?
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.
What is a death benefit?
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
What is cash value?
Cash value is the additional profit that life insurance policyholders receive on their paid premiums once they cancel the policy and withdraw their investments.
Is whole or term life insurance more expensive?
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.