What are the Differences Between Term Life and Whole Life Insurance?

Whether you're starting your family, planning to retire soon, or just bought a house, life insurance is a great way to secure your family's financial well-being and plan for the future. While no one enjoys thinking about a premature death, planning for the worst can keep you financially covered in any situation.

In this article, we'll compare term life and whole life insurance so you can decide which option is best for you and your family. Keep reading to learn the differences between whole life and term life policies!

What is Whole Life Insurance?

Let's start by defining whole life insurance – this type of insurance policy provides lifetime coverage as long as you keep paying the premiums. While this is a more expensive option, it can be less costly over the long term since you can lock in your rate early – the premiums stay the same over time, so you won't have to worry about rising insurance costs.

One of the best parts of a whole life policy is that it usually involves a cash value. This is like a built-in savings account that grows over time, as long as the premiums are paid. You can borrow from this cash value accumulation rather than taking out loans at a bank – this comes in handy when you need more retirement income, want to pass on an inheritance to your family, or are trying to make a large purchase, like buying a house.

Whole life insurance is the best option for people trying to build long-term financial security. Typically, you'll need to take a medical exam and be in good health in order to qualify for whole-life insurance. However, if you have preexisting conditions and don't think you can pass a medical exam, you could sign up for guaranteed issue life insurance. With this policy, you don't have to undergo a medical exam, but you might pay more in premiums.

Key benefits of whole life insurance:

Savings component: Whole life insurance is a great way to have another savings outlet due to the cash value component. Unlike other insurance options, this can help you build wealth over time.
Predictable cost and payout: The premiums stay the same, and so does the payout. You won't have to worry about your insurance expiring in 10 or 20 years – you'll have it locked in as long as you're alive.

What is Term Life Insurance?

Term life insurance is another form of life insurance that lasts for a set period of time. This period, the "term," usually ranges between 10 and 30 years. After the term is up, you'll either need to renew your policy, turn it into a permanent policy, or cancel it altogether if you have enough money and investments that a life insurance policy is no longer necessary.

This life insurance option is much more affordable than whole life insurance, since you won't be covered for life. However, it's an excellent option for ensuring you are covered during your prime working years – it can help cover a mortgage, pay for childcare, or cover other daily living expenses for your family if you unexpectedly pass away. The best part is that it doesn't cost an arm and a leg, so it's very easy to fit within your budget.

Key benefits of term life insurance:

Affordable: You can get a term life policy for under $50 per month if you are young and healthy. This is a small price to pay for peace of mind.
Covered during critical financial years: Mid-life is when it's most important to be financially prepared, especially since these are your prime years for income, and many people are paying a mortgage and raising kids.

Comparing Term Life and Whole Life Insurance

In this section below, you'll find the key differences between term life and whole life insurance.

Coverage duration

You'll only be covered temporarily with term life insurance, typically between 10 and 30 years. However, whole life insurance covers your entire life as long as you keep paying the bill.

Premium costs

Premium costs are much lower for term life, usually only around $200 a year for a healthy young person. On the other hand, whole life insurance costs much more, usually between $400 to $500 per month. Keep in mind that some of this cost goes toward the cash value, which means you'll be able to access it later in life.

Cash value

While term life insurance does not have a cash value, whole life insurance offers a cash value, which is like a built-in savings account.

Flexibility

Term life insurance offers simpler policies – you just choose your coverage amount and duration. Whole life insurance has more options with more stable benefits. If you have a lot of disposable income and want to build long-term wealth, whole life is the best option. If you have a growing family with little room in your budget, term life is a good choice.

Term and Whole Life Insurance Alternatives

Whole and term life insurance only offers a limited number of options – you may want more flexibility over where your premiums go or how much you pay in premiums. So, what are the alternatives to basic term or whole life insurance? Read about other kinds of life insurance below:

Universal life insurance: Also known as adjustable life insurance, this permanent life insurance policy allows you to adjust your premiums and death benefit. It also has a cash value that earns interest based on the current money market rates, so there is an investment component.
Guaranteed issue life insurance: While this option has higher premiums, it doesn't require you to undergo a medical exam. If you know that you have health issues that may hinder you from getting whole-life insurance, this can be a great choice, but remember that you'll pay more for it.
Variable life insurance: This type of life insurance is all about investing – your premiums will be put into stocks, bonds, and mutual funds based on your preferences. While there is an inherent risk to this, it can really pay off if your investments do well.
Final expense insurance: If you're looking for small premiums and a small death benefit, consider final expense insurance. This is for people who simply want to ensure they can afford end-of-life costs, like medical bills and funeral expenses. Medical exams usually aren't required for this type of coverage, so it's a good option for older people or those with health issues.

Factors to Consider When Choosing Life Insurance

When you're thinking about getting a life insurance policy, there are several things to consider as you compare policy options, term lengths, and overall coverage. Here's what you need to keep in mind.

Financial goals

First and foremost, consider your financial situation and goals, and how a life insurance policy aligns with those goals. For example, you may want to leave a large inheritance for your children one day. In this case, a whole life policy can help you toward that goal.

Or, maybe you're the primary breadwinner, and you know that your spouse couldn't handle the mortgage on their own – however, you don't have a lot of extra room in your budget for a hefty insurance premium. In this situation, a term life policy would cover your bases while also remaining affordable in the long term.

Age and health

Unfortunately, age and health do make a difference when it comes to life insurance. If you're older, you can expect to pay more in premiums. If you have preexisting health conditions, you may not qualify for specific life insurance policies, or they may be more expensive.

The good news is that the younger you sign up for life insurance, the less you can expect to pay. Additionally, good health will help you lock in at a reasonable rate. Before you undergo an insurance medical exam, spend some time focusing on healthy habits – you'll want to quit smoking, reduce alcohol consumption, start exercising, and eat healthy.

If you can implement these habits a few months before you undergo the medical exam, your numbers may look better, and it will be easier to get a lower premium.

Life stage

People of older age may already be self-insured, which means they already have enough savings and investments to cover them in an unforeseen event, so life insurance doesn't need to be a priority.

On the other hand, young couples with a house and children definitely want to make sure they have some form of life insurance for their dependents in case the worst were to happen. Your stage of life plays a big part in whether or not you need life insurance and what type of life insurance you need.

Future family needs

Not only does your life stage play a significant role, but your future family needs are also important to consider when it comes to life insurance. It's not just about preparing for an unexpected death – you can leverage life insurance to support your family's needs.

For example, a whole life policy's cash value can help you start a college fund for your kids or help you with estate planning in older age.

How To Choose Between Whole Life and Term Life Insurance

Check out the scenarios below to help you choose between term and whole-life coverage!

Here are some situations in which whole life is better:

If you can afford higher premiums: Whole life is a long-term commitment, so make sure the premium cost comfortably fits into your budget.
If you want lifelong coverage: This is the best option for people who want to lock in a rate early and never worry about it again.
If you have a lifelong dependent: If you have a child or relative with disabilities, this payout from your life insurance can set up your dependent for the rest of their life.
If you want built-in savings: This coverage has a guaranteed cash value set by the insurer.

Here are some situations in which term life is better:

If you only want coverage for a set amount of time: If you only need life insurance while taking care of young kids or paying off a mortgage, term life is your best bet.
If you want affordable coverage: There's no doubt that term life is the most affordable life insurance option, especially compared to whole life.
If you don't need a cash value: If you'd rather invest your money elsewhere outside a life insurance policy, term life will give you coverage without the built-in savings. Your other investments may generate more of a return, but term life will guarantee that your family is covered in the event of a premature death.

Conclusion

To recap, whole life insurance covers you for your entire life and also provides a cash value component, while term life insurance covers you for an agreed-upon period of time. Ultimately, the right choice for you depends on your individual circumstances and needs.

At Think Life, we'd be happy to help you weigh your options and determine if term life or whole life is best for you. Contact us today to speak with an experienced insurance provider and learn more!

Frequently Asked Questions

Which is better – whole life or term life insurance?

The answer to this question depends on your wants and needs – term life can be better for a shorter amount of time, while whole life is good for building more financial security.

What is the main disadvantage of term life insurance?

The main disadvantage of term life insurance is that it only provides temporary coverage. In other words, it doesn't last forever. If you want a more permanent solution, whole life is worth considering.

What are the disadvantages of whole life insurance?

The main drag of whole life insurance is the high premiums, which could be costly over time.

Can you cash out term life insurance?

Term life insurance does not have a cash value. However, it is possible to convert your term policy into a permanent policy and then cash it out.