Which Is Better – Term Life or Whole Life Insurance?

BENEFITS OF TERM LIFE INSURANCE VS. BENEFITS OF WHOLE LIFE INSURANCE

Term Life Insurance Benefits Whole Life Insurance Benefits
Cheaper premiums Cash value
Easier to understand Front-loading cost is more effective long-term
Peace of mind Does not expire

While any life insurance policy is better than none, understanding the differences between term life insurance and whole life insurance will help you discover which works better for your situation.

 

Term Life Insurance

When you think about life insurance the generic plan that comes to mind is usually term life insurance. This is the easiest policy form for most to understand because it is much more straightforward, and there are only a few additional features to complicate things.

 

Advantages of Term Life Insurance

Term life insurance is probably the most simple plan that you will look at, and there is a set schedule of payments. Because the liability of the insurance company is less with term life insurance this plan is much cheaper and easier to afford.

While term life insurance policies do have a date that they end, they come in many varieties. You can purchase a policy that lasts anywhere from a year to 30 years, and sometimes even more than that. This is great for situations where the money will no longer be needed, such as raising a child or covering a mortgage.

 

Disadvantages of Term Life Insurance

While term life insurance is nowhere near as expensive as other policies, the price can fluctuate due to variables like the size of the death benefit or the length of the policy. Most life insurance companies require a medical exam before you can purchase a policy, and any health complications you have can raise the rates as well.

Term life insurance expires eventually, so there is a decent chance that you will spend all the money on the premium with nothing to show for it in the end. It’s a sizable price tag for peace of mind.

You also cannot use any of your investment in the policy to build your wealth or defer taxes. There is no cash value of the policy to borrow from or use as collateral, so this policy only pays off in the event of your death.

 

Where Term Life Insurance Comes Out on Top

Term life insurance is a great choice for someone who has dependents or debt and needs to purchase a life insurance policy but cannot afford a more expensive plan. These policies are common purchases for young parents or single parents, and others may match the term to their debt timelines to assist with any after-death burden that may occur.

 

Whole Life Insurance

Whole life insurance is a permanent life insurance policy that does not have an expiration date. While the policy can be terminated either by request or if enough payments fail, most policyholders are able to stay current and take advantage of its many benefits.

Unlike term life insurance policies, you have a cash value with a whole life plan. In addition to the death benefit, you can tap into the policy to assist in financial decisions while you are still alive.

 

Advantages of Whole Life Insurance

Because these policies last from the activation date to termination or end of life your premium payments remain the same. This is easier to manage when budgeting, and securing a whole life policy earlier in life can lead to lower payments as you get older.

Your premiums also gain interest, usually at a rate of 1 to 2 percent annually. Some companies sell participation policies, also known as with-profit policies, that pay dividends to policyholders each year. These dividends tend to increase over time.

The cash value of a whole life insurance policy is one of its most attractive features. This value grows over time, and taxes on the interest are deferred. If you need to borrow against or withdraw from the cash value you can do so to cover expenses such as:

  • College tuition
  • Emergency expenses
  • Home repairs/projects

This makes whole life insurance a financial tool in the present as well as a plan for the future.

 

Disadvantages of Whole Life Insurance

If you do not pay attention to the terms of your whole life insurance policy or you borrow too much too often then you can diminish the death benefit. The cash value is not kept completely separate, and this can affect the original intention of securing a life insurance policy.

Whole life insurance plans have plenty of additional benefits, but they come at a cost. These policies can be anywhere from 5 to 15 times more expensive than a term plan, even if the death benefit is the same. If you are not financially prepared to take on the cost it may not work out long-term.

If you do need to cancel a whole life insurance policy you usually need to pay a surrender charge. This can be expensive, rising to 10 percent of the cash value, but that percentage usually decreases the longer you hold the policy.

 

Where Whole Life Insurance Comes Out on Top

Whole life insurance is usually preferred for a few reasons.

As long as you can afford the plan, this gives you much more flexibility in managing your money. Investing in a whole life insurance policy earlier in life feeds into a lower premium as you age.

Whole life insurance policies also have more variations, so you can usually find one that fits your situation without forfeiting the unique benefits and features.

 

Deciding Between Term Life Insurance and Whole Life Insurance

Purchasing a life insurance policy is not a decision that should be made lightly, and the information in this article should give you a good idea of which policy will be of most use to you. Term life insurance can get you peace of mind without killing your budget. Whole life insurance can shower you with plenty of short and long-term benefits.

To find a policy that best fits your situation contact Sim Gakhar. With over 12 years of experience, you are guaranteed to find the path that you need to bet on.

 

FAQs & Helpful Resources Regarding Whole Life Insurance