Term vs Whole Life Insurance: A Comprehensive Guide
For the average young person on a limited budget, life insurance is simply not a priority. It may seem like just another draining expense on top of student debt, credit card bills, rent, and other pressing financial obligations.
But in reality, buying life insurance is actually one of the smartest things you can do for your family’s future finances. Choosing the right life insurance plan can provide your loved ones with a safety net in the event that the unthinkable happens. And it doesn’t even have to be that complicated or expensive! Your policy can be as simple or comprehensive as you want – it all depends on what type of policy you choose.
We understand that choosing an insurance policy can be confusing, which is why we’ve created this handy guide. We’re going to be comparing the two most common life insurance variations: term insurance vs whole life insurance.
Read on to find out which policy is better for you!
Life Insurance: The Basics
Life insurance is a contract between a person (the insured) and an insurance company (the insurer). This contract stipulates that, in the event of the insured person’s death, the company will provide the insured person’s beneficiaries with a death benefit.
You can categorize life insurance policies based on the length of the coverage period. Whole life (also called permanent life) insurance is valid from the moment you sign the contract until your death. Term life insurance, on the other hand, insures you for a predetermined period of time, typically 1-30 years.
There are other types of policies, but most of them are variations of either whole or term life.
What Is Term Life Insurance?
Term life insurance policies tend to be simpler than their permanent counterparts. This type of policy covers you for a specific period of time that you and the insurance company agree on before the policy goes into effect. If you pass away any time within this insured period, your beneficiaries can collect the death benefit.
The death benefit in a term life policy stays constant throughout the insured period, as long as you make your payments. You’ll know exactly how much you’re insured for so that you and your family can plan ahead. However, do take note that your beneficiaries are not legally obligated to use the death benefit how you want them to.
Get Insured On Your Terms
Term life insurance policies are popular alternatives to whole life insurance policies because they allow you to control exactly how long you’re insured for. This means that you won’t have to commit to a policy for the rest of your life if you only need insurance for a certain period of time.
If you’re a breadwinner, you may want to take out a term life policy that covers you until your kids are out of school or your mortgage is paid off. This provides your family with a safety net in the event that you die before your financial responsibilities are fulfilled.
Pay For More Affordable Coverage
A term life policy is the more affordable insurance policy option, so it’s great for people who are on a tight budget. You only pay for the coverage you need, whether that’s 5 years or 30 years. You can also plan out exactly how much you’re going to spend on your insurance right from the start.
If you wish to extend the coverage period past your initial term, you have to renew your term policy. Keep in mind that premiums go up as you age, so you’ll likely have to pay more upon renewal. Some conditions could also disqualify you from renewal (or cause your premiums to go up significantly), such as a terminal illness diagnosis.
Have More Versatility And Flexibility
Since term life insurance policies are shorter than permanent life insurance policies, insurance agencies can modify them in ways that can’t be done for whole life policies. For example, some term life policies may offer much lower initial premium rates that increase as your earnings do. Term life insurance policies may also give you the option to transition into a whole life insurance policy later on.
What Is Whole Life Insurance?
Whole life insurance policies are insurance plans that cover you for the rest of your life, as long as you continue paying your premiums. They can be a little more complicated than term life insurance policies when it comes to cash value, but they’re also more straightforward in how they cover you.
Get Protection For The Rest Of Your Life
A permanent life insurance policy is just that – permanent. You won’t have to worry about losing coverage because whole life insurance stays in effect as long you make your payments. You also don’t have to be concerned with policy renewals, changing policy conditions, or rising premiums.
Save More In The Long Term
Whole life premiums are usually more expensive than term life insurance, but you could potentially save more in the long run compared to renewing a term life insurance plan whenever your coverage ends. Your premium rate will stay the same as you grow older, and you won’t have to deal with the higher premiums that usually come with age.
Turn Your Whole Life Insurance Into An Investment
Other than its coverage length, the main difference between a whole life policy and a term life policy is its savings component (also known as a “cash value”). Part of your monthly insurance payments goes into growing this cash value. Your money is typically stored in a tax-deferred account, which means that you won’t have to pay taxes on any gains until you withdraw.
This added investment component gives you a lot of flexibility down the road. You can use this cash value in many ways:
You can use it to increase the death benefit that your beneficiaries receive.
You can withdraw money from it or take out a loan against its value.
You can use it to pay the remainder of your premiums.
If you choose to surrender your whole life policy, you can exchange this cash value for money.
Term vs Whole Life Insurance: Which Should You Choose?
Still confused about which type of policy you should choose? Here’s a list of questions that you should ask yourself before you decide between whole life insurance or term life insurance.
How Long Should I Be Covered For?
It’s best to start by asking yourself the simplest question: how long do you need to be covered by your life insurance policy? Are you looking for a life insurance plan that insures you for a specific period of time, or do you want a more general policy that covers you for the rest of your life? Knowing your desired coverage period early on will help you settle on your term for life insurance.
What Are My Goals For My Life Insurance Plan?
People take out life insurance for a variety of reasons. Why you’re taking out a policy in the first place will help you decide on either whole life insurance or term life insurance.
Are you mainly concerned about providing your family with a short-term financial safety net that covers a specific period? Or do you also want to build cash value to generate a usable financial return even when outliving the policy? Settling your goals early on will help you rule out the options that don’t apply to your situation.
How Much Am I Willing To Spend On A Life Insurance?
Your budget is one of the biggest factors that will affect your decision. Your life insurance policy only provides coverage for as long as you make your payments. After all, the type of policy that you choose won’t matter if you can’t afford your premiums.
People looking to be insured while on a budget should explore term life insurance options. Term life policies are generally much shorter, cheaper, and less of a commitment than whole life insurance.
On the other hand, whole life policies are great options for those who want to invest in their future through life insurance. Whole life policy premiums are initially more expensive because of the cash value component, but premiums remain the same throughout the length of the policy. You may end up saving more by sticking with a whole life insurance plan instead of repeatedly renewing a term life policy.
Do I Have Other Avenues For Growing My Money?
The ability to grow cash value is one of the main reasons people choose whole life insurance over term life insurance. This savings component allows your whole life insurance policy to serve as both an insurance policy and an investment. Plus, it’s relatively low risk – your cash value is guaranteed to grow as long as you continue making your payments. For people who don’t have other investments (or a low risk tolerance), this is a great option.
However, if you have other ways to grow your money or want higher returns from your investments, consider taking on a more affordable term life insurance policy. Instead of paying higher premiums for the cash value component, you can get a cheaper life insurance plan and channel your savings into other investments.
Choosing the right insurance policy ensures that you get the coverage that you need at a price you can afford. It might seem like an intimidating task at first, but all you need to do is to analyze your situation and settle on which aspects of your potential policy are non-negotiable.
A whole life policy provides you with life-long financial security for you and your family. Whole life insurance policies also come with a cash value component that gives you returns on your premium payments. If you want to invest money and provide your family with long-term financial protection, then whole life insurance could be for you.
On the other hand, a term life policy gives you a higher degree of control when it comes to coverage. Term life insurance policies are affordable, adaptable, and less complicated. If you only need to be insured for a specific period of time (or if you want to customize your policy), term life insurance might be the way to go.
If any of this still confuses you, don't worry! Wesley LLC is here to help. Call us today to learn more about what life insurance options are available for you!