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Term vs. Whole Life Insurance: How to Choose

Term vs. Whole Life Insurance
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There are two things in life that are guaranteed: death and taxes. While you can’t very well prepare for taxes, you can prepare for death by buying life insurance.

However, with the many options of insurance available today, you might get confused between term and whole life insurance, so which one should you choose?

Term life insurance is the better option for most people because it provides a predictable, cost-effective plan for the next 10 to 30 years. At the same time, whole life insurance may be a good option for those willing to spend much more on their policy to access investment benefits.

This article will explain term and whole life insurance in depth by analyzing each, comparing the two, and illustrating how they match up in the real world. 

What is The Difference Between Term & Whole Life Insurance?

Term and whole life insurance are two of the most widely known forms of life insurance. 

So if you want to buy a policy, it’s likely that you will hear a lot about the two. The biggest difference between them is that term life insurance has an end date, while whole life does not.

For most consumers, this is beneficial because it is predictable and straightforward. You pay your premium each month with peace of mind knowing that your beneficiaries will receive a death benefit if you pass away during that term. 

On the other hand, whole life insurance is a bit more complicated. 

It acts as a life insurance policy and an investment product, which can affect the death benefit if borrowed from it. Also, it is five to 15 times more expensive than a term policy.

What is Term Life Insurance?

Term life insurance is insurance that lasts for a fixed amount of time. Typical term lengths range from 10, 20, and 30 years, which is a good option for individuals looking to be covered for a specific time period. 

People with term life insurance policies can be covered during the most important times of their lives, like during their child-rearing years or while they hold a mortgage or other large debt.

How Term Life Insurance Covers You

Term life insurance is “pure” insurance, meaning its purpose is solely to provide financial protection to your designated beneficiaries if you die. 

As long as you pay your premium every month, you will have insurance for that entire period.

This finite nature of term life insurance makes it a logical choice for many consumers in an unpredictable world. If your circumstances change, you have the flexibility of canceling your policy with no penalties. 

Let’s look closer at a comprehensive breakdown of the typical cost of a term life insurance policy from Quotacy

Healthy, Non-Smoking, 30-Year-Old Male

Term Length

Coverage Amount

Monthly Premium

20-Year Term

$250K

$12.62

20-Year Term

$1M

$34.12

30-Year Term

$250K

$18.34

30-Year Term

$1M

$53.01

Pros

  • Easy to understand
  • Can cancel at any time with no penalties.
  • Affordable premiums

Cons

  • Finite coverage
  • Benefits end when the policy ends
  • Premiums increase incrementally throughout the policy.
  • Premiums will increase when renewed at an older age.

What is Whole Life Insurance?

Whole life insurance is a form of permanent life insurance. Consumers who invest in this type of insurance can rest assured, knowing that they will always be covered. However, there is a hefty price for this permanence.

On average, policyholders pay between five to 15 times more on their premium than those with term life policies. However, they also have more benefits available to them.

The Benefit of Whole Life Insurance

In addition to having a guaranteed death benefit, whole life insurance policies also accumulate cash value and earn a guaranteed interest rate. A portion of your premium goes to your death benefit, one goes to the insurer, and the other goes to the cash value. 

However, it is worth noting that if you take out a loan against the cash value, this amount will be deducted from the death benefit along with the interest due. Still, if used responsibly, whole life insurance can be a great financial tool for many individuals. 

Let’s take a closer look at an illustration of the average cost for a whole life insurance policy from Quotacy. 

Healthy, Non-Smoking, 30-Year-Old Male

Coverage Amount

Monthly Premium

$250K

$258.63

$500K

$510.66

$1M

$1014.72

Pros

  • Doubles as a financial investment tool
  • Guaranteed coverage for life
  • Cash value is tax-deferred
  • You can withdraw from or borrow against your policy.

Cons

  • Expensive
  • Fee charged for borrowing/withdrawing your money.
  • Withdrawals/loans affect the death benefit.
  • May be subject to fees for canceling.
  • Cash value accumulates slowly.
  • The unused cash value is returned to the insurer post-death.

Term vs. Whole Life Insurance: Which is Right for You?

Choosing the right life insurance ultimately depends on your unique situation. You’ll need to consider both insurance types and determine what makes sense using your current budget as you also look to your family’s future needs should something happen to you. 

Consider the following when making this important decision. 

You should buy life insurance if you meet the following conditions:

  • You have limited funds budgeted for life insurance.
  • You need a simplified policy.
  • You only need to be covered for a certain amount of time.

You should buy whole life insurance if you meet the following conditions:

  • You can afford a more expensive policy.
  • You want to enjoy the investment benefits.
  • You need coverage for life.

Final Thoughts

Term life insurance is the better option for many consumers because it makes sense financially and logically. It gives you the coverage you need while remaining simple and affordable.

However, for many people, the investment benefits of a whole life policy are a viable option. Just make sure to consider the premiums and read all of the fine print on both policies.

Thinking about life insurance is never easy, but the peace of mind a policy brings makes the time spent investigating term and whole life insurance worthwhile.

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