• Retirement and Annuity Advisor Jennifer Lang

What Are The Pros and Cons of Term Life Insurance vs. Whole Life?

Term vs. whole life insurance: Which is right for you?

If the distinction between term and permanent life insurance like whole life seems a little vague to you, you’re not alone. While most people know that life insurance will pay a sum of money to their beneficiaries if they pass away, they may not be able to explain the differences and benefits of term life insurance vs. whole life insurance. But if you want to protect your family’s financial future, it’s important to know the basics about these two options.

What is term life insurance?

A term life insurance policy is exactly what the name implies: It’s a policy that provides coverage for a specific term or period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike whole life insurance, there’s no cash value component to the policy – it’s designed purely to give your beneficiaries a payout if you pass away during the term.

If you get a term policy to protect your family, you should think about whether your family’s need for life insurance will change before the time the term expires. For most people that means the kids are grown up and on their own, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse.

What is whole life insurance?

A whole life policy is the simplest form of permanent life insurance, so named because it provides coverage that lasts your entire life as long as premiums are paid. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component. A policy has cash value when a portion of your premium dollars are invested and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.

A policy’s cash value provides a number of benefits that you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens you can borrow money against your policy’s cash value in the form of loans or withdrawals1, use it to pay your premiums, or even surrender it for cash to supplement you in retirement. While there are other types of permanent life insurance, whole life is the simplest:

  • The premium remains the same for life

  • The death benefit is guaranteed

  • The cash value grows at a guaranteed rate

Note that with some companies, whole life policies can also earn annual dividends (a portion of the insurer’s profits) that can increase your cash value and provide other benefits.

What are the pro and cons of term life vs. whole life?

The biggest difference between the two types of policies is that while both pay a death benefit to your beneficiaries, whole life also provides permanent (lifelong) coverage with a cash value component. That added value – along with the certainty that the insurer will eventually have to pay a death benefit – means that a whole life policy premium is higher than for a term policy. Here are some of the other features and differences between the two types of policies:

What to consider before you buy a whole or term-lifepolicy

Every person is unique, and the decision to buy a whole vs. a term policy should be guided by your specific situation in life and the things that matter to you, including (but not limited to) such things as:

  • How old are you?

  • How good is your health?

  • What are your family’s financial needs?

  • What are the ages of your children?

  • Are you concerned about long-term health expenses and serious illness?

  • What is the amount of your mortgage and other debts?

  • What are your plans for retirement?

  • What college plans do you have for your children?

  • How will you pay for funeral expenses?

  • Are you concerned about estate planning and tax ramifications?

  • Are you setting up a trust as part of your will?

  • Do you want to leave part of your estate to charity?

  • Do you have existing life insurance, perhaps through your employer?

Because even though there will be a large cost difference between a term policy and a whole life policy at first, when you consider all the benefits that a whole policy can provide over the course of your life – and the certainty of an eventual payout – you may feel it’s a better overall value.

How much will each kind of policy cost me?

Many factors contribute to the cost of life insurance policy – some you can’t control, but others you can. By learning what impacts your premiums before you get a life insurance policy quote, you can better understand your options when choosing what’s best for you and your family.

Your policy type (term, permanent or IUL), age, health, gender, driving record, occupation, hobbies, and the amount your loved ones would receive all contribute to the cost.

Let us help you find the right coverage.

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