Term vs Whole Life Insurance

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A life insurance policy can provide you peace of mind knowing your loved ones will have a financial safety net should you pass away while insured.

Term life insurance tends to be the more affordable type of life insurance, but has an expiration date. Whole life insurance, on the other hand, can provide lifelong financial protection, but is more expensive.

Learn more about the length of coverage and benefits available to you through these types of life insurance.

Table of Contents

Term Life Insurance vs. Whole Life Insurance

Term and whole life insurance are similar in that they both offer a guaranteed death benefit. However, there are some key differences between these policies.

What Is Term Life Insurance?

Term life insurance gets its name from the fact that this type of coverage expires after a set period of time. If the policyholder dies before the policy term expires, beneficiaries usually receive payment.

Insurance companies can deny claims for a variety of reasons, including if the policyholder dies during the contestability period that can last up to two years. During this time, the company reserves the right to perform a thorough review of your coverage before a payout.

The fact that it is not a term life insurance is not a lifelong policy makes it a cheaper option compared to whole life insurance.

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What Is Whole Life Insurance?

Whole life insurance remains in effect for the life of the insured.

Like other forms of permanent life insurance — including variable and universal life insurance— whole life policies have two components: a guaranteed death benefit and a savings account called the cash value. As you pay your premium, a portion of the money goes toward funding the cash value component, which you can borrow from during your lifetime.

The cash value of your whole life insurance policy continues to grow over the long term. This is guaranteed, based on a formula put forth by the insurance company. With other forms of permanent life insurance, the cash value is not guaranteed and is determined by other factors including current insurance rates.

Some whole life insurance companies even guarantee an annual rate of return on the policy’s cash value.

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What is the difference between term and whole life insurance?

If having whole life insurance is like buying peace of mind, having a term life insurance policy is like renting it.

The following comparisons are designed to provide you with a general picture of the differences between term and whole life to help you choose the best life insurance for your financial needs.

Policy terms

Policy terms represent the period of time during which the policy, and thereby the coverage, is active.

Term Life Insurance Whole Life Insurance
Term lengths between 10 and 30 years. The most popular option is the 20-year term policy. As long as premium payments are fulfilled, coverage is meant to last throughout the insured’s lifetime.
In some cases, policies are renewable in 5-year increments.
Depending on the policy, coverage may terminate once you reach a certain age.

Policy premiums

A premium is the amount of money the insured pays for coverage. The agreed-upon life insurance cost is paid periodically, usually on a monthly basis.

Term Life Insurance Whole Life Insurance
Typically, premiums for term life are more affordable than for whole life. Premiums for whole life insurance policies tend to be 10+ times more expensive than term life.
Their affordability is the result of the coverage expiring after a number of years. You won’t see an increase over time, as these policies have “level premiums.”
Premiums may go up if the policy is renewed or the death benefit is increased. One portion of the premium payment covers the cost of the policy while the other adds to the policy’s cash value savings account.
Term life insurance rates can also go up if a medical exam reveals a health complication.

Death benefit

An insurance policy’s death benefit is the payout made to the beneficiaries in the event of the insured’s death. Essentially, it is the dollar amount your family will receive should you die while your policy is active.

Term Life Insurance Whole Life Insurance
A term life policy guarantees its benefit, so long as the insured had active coverage at the time of death. The death benefit is guaranteed during the lifetime of the insured.
Increasing the death benefit may result in higher premiums. If the insured takes out a loan against their policy or makes a withdrawal from the cash value and doesn’t pay it back, the borrowed amount will be deducted from the death benefit upon their death.

How to choose between term life and whole life insurance

The choice you make will depend largely on your personal circumstances, like your family and home situation, as well as your available budget.

If you have a financial obligation such as a mortgage, it would make sense to have term life insurance during the life of your home loan. On the other hand, if you’ve exhausted other investment vehicles, a whole life insurance policy may help you in estate planning for the benefit of your loved ones.

Speaking to a financial planner is always helpful in order to make a well-informed decision.

Here are some things to keep in mind when comparing life insurance options:

  • Term life insurance can be cheaper but has an expiration date.
  • Whole life insurance lasts a lifetime, but it’s more expensive.
  • Do you want affordable life insurance coverage during a set period of time? Consider term life insurance.
  • Do you want a lump sum payout for your beneficiaries, no matter when you die? Consider whole life insurance.
  • Are you concerned about life insurance premiums? Request a free life insurance quote.

If you want coverage right away but haven’t made up your mind about the type of policy, consider term life with a conversion rider. This will allow you to convert it to whole life. If in doubt, consult a qualified insurance agent.

If you’ve aged in the intervening years since you first took out your term life policy, you may want a more robust policy. Typically, this process does not require a medical exam.

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Summary of Money’s Guide to Term Life vs. Whole Life Insurance

Term Life Insurance

  • Cheaper premiums
  • Guaranteed death benefit
  • Some insurers offer the option to the policy to whole life insurance
  • Coverage expires at the end of the term
  • Has no cash value

Whole Life Insurance

  • Guaranteed death benefit makes it better for estate planning
  • The policy will build cash value over time
  • The insured can take out loans against this type of policy
  • Considerably more expensive than term life
  • Loans may decrease your death benefit

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