Life insurance is one of the most important purchases an individual makes in their lifetime. Life insurance can provide financial security and protection in case of a tragedy, while being utilized as an investment opportunity for retirement, financial or estate planning. It is vital that consumers have an understanding of the advantages and disadvantages of different types of life insurance, particularly term and whole life insurance, before deciding which kind best meets their needs and financial goals.
When comparing term vs. whole life insurance policies, both have pros and cons that make each the best option for a family with specific needs and future financial goals.
Researching each type and then getting free online quotes to compare rates, policies, and companies is the only way a potential policyholder will know whether they are buying the best coverage.
What Is Term Life Insurance?
Term life insurance is temporary insurance that covers an insured person for a specified period of time, which can be anywhere from 3 months to 30 years. If the insured person does not die within the policy period, no payments are made and the insurance company retains the full amount of the premium payments; otherwise, if a tragedy does occur and the insured person dies, the insurance company will payout the death benefit to the beneficiaries.
In the event that an individual still needs protection when the policy expires, a new term life contract will have to be applied for and purchased, usually at higher rates that are adjusted for new medical conditions and the applicant’s older age.
Term policies with shorter terms are cheaper, but new policies will have increasingly higher costs as the insured person grows older. Buying a 30 year policy at a young, healthy age is usually the best way to get the cheapest premiums and get insurance coverage for most of your life.
When comparing term vs. whole coverage, term life insurance has cheaper initial premiums for young individuals, making it more affordable for young families or individuals with limited incomes. If the policy is renewed, the amount of the death benefit can be increased or decreased, making it more flexible than the fixed death benefit of whole life.
Term life insurance is an inexpensive and flexible way to cover financial obligations that have a definite time limit, like mortgages and loans, and ensure survivors are not left with debts or loans they may be unable to pay off.
While the cost is higher, whole life insurance returns a portion of the premiums, with interest, in the form of a cash value or equity, while term protection offers no return of premiums. Because whole policies are permanent, payment of the death benefit is guaranteed. Term only pays the death benefit if the insured person dies during the policy period.
When comparing the total cost of term and whole life insurance rates, experts estimate that, in a lifetime, premiums are comparable due to the fact that whole coverage is an investment with a return, and term rates increase with age. Again, term products are the most popular types, and for good reason, but some families may find that whole insurance better suits their financial and future needs.
What Is Whole Life Insurance?
Whole life insurance is permanent insurance which cannot be cancelled by the insurance company unless the policyholder fails to pay the premiums. Whole features a fixed premium and death benefit that does not increase or change as the insured person ages.
Part of the premiums are put into an equity account called the cash value. A guaranteed rate of interest is paid on the cash value, which appreciates over years and can be withdrawn or used as security for low or no-interest loans. Overall, whole life insurance as an investment is considered to be a good one, and can help force families to save for retirement.
Since whole life insurance is permanent, it does not expire and cannot be cancelled due to age or illness. This means that, if for any reason, the insured person becomes uninsurable, the whole life coverage will still provide protection, but term policies expire and the person may be unable to buy a new one.
The cash value feature is an advantage that can provide income in emergencies and help meet long-term financial goals such as a down payment on a home. If the cash value of the policy is withdrawn, the equity does not even need to be paid back, and will simply be subtracted from the death benefit payout in the future.
Whole life insurance has a fixed death benefit which cannot be increased or decreased as your needs change over time. Term life rates are usually more affordable for young people. The premiums continue over the insured person’s entire life, which can present a hardship to older individuals who live on fixed incomes.
However, when considering term or whole coverage, term premiums for older people may be higher than those of a long-term whole policy. When comparing the pros and cons of term and whole life insurance, just remember to take into consideration every detail, especially the whole cash value.
How Rates Are Calculated
Insurance companies use the age of the applicant, health issues or medical conditions, the length of the policy term and the value or death benefit to determine your life insurance rates. Term policies have lower premiums for young applicants, but when new insurance policies have to be purchased, premiums can be significantly higher, though that may be an issue some policyholders and families will want to deal with in the future instead of now.
Whole life insurance rates are higher in the early years of the policy, but a portion of the premiums are returned to the insured as cash value, offsetting those higher premiums and offering good, long term value. Since whole life premiums never increase, over a lifetime, experts and financial advisers suggest the costs of term and whole life are about the same.
Modified Whole Life As An Alternative
When comparing the advantages of term vs. whole life insurance, term offers lower initial costs and more flexibility, but whole provides permanent coverage and long term investment potential.
One alternative is modified whole life insurance, which offers lower initial premiums that increase over time. The death benefit is still fixed, but for individuals that want the investment advantages of permanent coverage and expect their income to increase in the future, modified whole protection may be the best type to buy.
Since the biggest disadvantage of whole life insurance is its lack of flexibility, using term life insurance to supplement a whole policy can provide enough extra insurance when coverage needs are greatest. When needs decrease, the term policy can be allowed to lapse while the whole life policy continues to provide coverage.
Instead of comparing term versus whole life, it is often smarter to use the advantages of both together to give families the best possible protection.