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Term vs. Whole Life Insurance: Know How to Tell the Difference

Term vs. Whole Life Insurance – Life insurance policy types can be put into two main buckets: term life and cash-value life insurance. One of the choices for cash-value life insurance is whole life insurance. There are other cash-value choices, too.

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Knowing the main differences between term vs. whole life insurance will help you zero in on the best life insurance for you.

Term vs. Whole Life Insurance

There are two main differences between term and whole life insurance: Premiums and cash value.

Term life insurance lets you lock in level premium payments for the term length, such as 20 years. Many term life policies allow you to renew each after the level term ends, but the renewal rates are usually very expensive.

Term life insurance is generally the most affordable type of life insurance because you are buying purely life insurance coverage. There is no cash value within a term life insurance policy.

If you decide to end a term life policy, you can simply stop paying premiums. If your policy expires while you are still alive, there is generally no refund of premiums.

Whole life insurance also has fixed premiums, and you’ll generally pay for the duration of the policy. A whole-life policy will build cash value at a steady, fixed rate. You can take out this money via a policy loan or a withdrawal.

If you decide to end the policy, you should notify the insurer so that you can get a surrender value of the policy.

Comparing the Cost of Term vs. Whole Life Insurance

It’s impossible to make an apples-to-apples cost comparison of term life vs. whole life insurance because the policy features are so different. If you’re looking for a long stretch of coverage with term life, look at 30-year term life policies. Banner Life (part of Legal & General America) and Protective Life offer 40-year terms, which is currently the longest level term available.

Whether you decide to buy term or whole life insurance, your life insurance quotes will be affected by:

  • Your age and gender.
  • Amount of coverage.
  • Your current and past health.
  • Your family’s health history (parents and siblings).
  • Your prescription drug history.
  • Other factors such as your driving record.

What Is Term Life Insurance?

Term life insurance is a contract between the policyholder that says the insurer will pay a certain amount to the policyholder’s beneficiaries if the insured person passes away.

People buying term life insurance must decide on the length of the level term and the coverage amount.

Term life insurance policies come in multiple types:

  • Level term: A level-term life insurance policy has the same premiums and death benefits throughout the level-term length of the policy, such as 10, 20, or 30 years. After the level term period, rates will go up every year if you renew. Alternatively, you could get quotes for a new policy if you still need life insurance.
  • Annual renewable term: A person with an annual renewable term life policy must renew it each year from the start, and will see higher rates as they age.
  • Decreasing term: Premiums stay consistent with a decreasing term policy but the death benefit decreases during the policy’s term. One type of decreasing term life policy is mortgage life insurance. The death benefit drops as you pay off your mortgage, though the premiums remain the same.
  • Return of premium term life: A return of premium term life insurance policy returns your premiums if you outlive the policy. This policy type is much more expensive than other types of term life.

What Is Whole Life Insurance?

Whole life insurance is a form of cash-value life insurance that remains in place as long as you make your payments.

There’s a cash value component that accrues over time. You can access your cash value through a withdrawal or loan, or you could surrender the policy and walk away with the cash value (minus any surrender charge).

Compare the Features of Term Life vs. Whole Life Policies

Premiums

Both level-term life and whole life have fixed premiums. That means your premium payments won’t change. Life insurance companies generally offer payment plan choices, such as monthly, quarterly, semi-annually, and annually.

If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single premium life insurance, or policies with payments for a certain number of years, such as 10 years. This allows you to have more budget flexibility later in life.

Payouts

Whole life and term life policies have a payout called the death benefit. The death benefit is guaranteed with both types of policies. A death benefit is paid tax-free to the life insurance beneficiaries you have listed.

The main difference is that coverage ends with a term life policy if you don’t renew it every year after the level term period ends. If you outlive your term life policy and don’t renew it, there is no death benefit ever paid.

Cash Value

Term life insurance builds no cash value while whole life policies contain a cash value account that builds over time at a fixed earnings rate.

This guaranteed cash value growth in a whole life insurance policy is one of the reasons whole life is considerably more expensive than term life.

The policyholder can take money from the available cash value. You can take a loan against it and pay for anything you want. Or take out money as a withdrawal that you won’t pay back. The outstanding loan or withdrawal amount is deducted from the death benefit.

Any cash value in the policy usually reverts to the insurance company when you pass away. Your beneficiaries receive the face value of the policy minus any amount that was taken out of cash value and not paid back.

If you’re looking for lifelong coverage without the high cost that a whole life insurance policy demands, consider guaranteed universal life insurance.

Ending a Policy

While you do your best to anticipate financial needs many years down the road, you might find you no longer need life insurance.

  • With term life insurance, you can stop paying, which terminates the policy. Since there’s no cash value, there’s no money to walk away with.
  • With whole life insurance, you may have cash value to take away if you surrender the policy.

If you don’t tell your insurer that you want to surrender your life insurance policy, the insurer will likely use any cash value in the whole life policy to continue paying the premiums on your behalf until the cash value is depleted. Instead of walking away, contact the insurer and take the surrender value, which is the cash value minus any surrender charge.

How to Choose Between Term Life and Whole Life Insurance

When choosing between term life and whole life insurance, consider your reasons for buying a policy. If you want life insurance to replace your salary for the 15 years until your youngest child leaves for college, you don’t need the hefty expense of whole life insurance. Term life insurance is a much cheaper option if you need coverage for a set number of years.

Term life insurance may be a good fit if:

  • You have a specific debt, such as a mortgage, that you want covered if you pass away.
  • You have children and want to make sure their college tuition is covered.
  • You want life insurance to cover a certain period, such as the number of years you have until retirement.

Whole life insurance may be a good fit if:

  • You want lifelong coverage.
  • You want to fund a life insurance trust.
  • You have a dependent who needs lifelong financial support, such as a special needs child.
  • You want life insurance that builds cash value you can access during your lifetime.
  • You want to ensure there’s a death benefit to provide money for funeral expenses regardless of when you die.

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