Curious about the difference between term and whole life insurance, and which is better? All life insurance offers financial protection for families if a wage earner dies prematurely, but whole life insurance also has a savings feature, which acts as an investment option, that the policyholder can use while he or she is living. On the other hand, term life insurance offers temporary insurance coverage with no savings feature, but is cheaper and more affordable than whole life policies.
When comparing term vs. whole life insurance, the pros and cons of each type of policy must be considered before determining which type offers the best coverage and protection for you and your family. Below, readers will learn about the key points and differences between term and whole life insurance.
Cheap Term Life Insurance
When assessing term vs. whole life insurance policies, it is the same as temporary vs. permanent coverage. With term life policies, payment of the death benefit is made only if the insured person dies during the policy term, but whole life guarantees payment because it is permanent, lifetime coverage and does not expire.
Since the insurance company may never have to make a payment on a term life policy, term life insurance rates are cheaper than whole premiums, especially for younger individuals or short policy terms. Whole life is more expensive since it never expires and the fixed premiums you paid at the age of 20 will be the same when you are 75. Whole life insurance provides more security and stability for policyholders.
Fixed Premiums For Life
Although the initial premiums of whole life insurance are higher than those of a term policy, the rates remain fixed over the insured person’s lifetime. An individual who buys a whole life policy at age 20 will pay the same rate when he or she is 65. Term premiums increase each time a policy is renewed or replaced because the insured person is older, may have developed medical issues or conditions, and will likely be a riskier investment by the life insurance company.
When comparing the lifetime costs, financial experts state that the cost actually averages to about the same amount for both types of coverage. The simple difference between term and whole life costs are that term life rates are initially more affordable.
Term Life Insurance Is Flexible
The need for life insurance changes over a lifetime. Since term insurance is temporary, consumers can buy the amount of coverage they need for the period of time that it is needed. A wage earner with financial dependents needs more life insurance than a retiree with no financial obligations. The biggest advantage of a term life policy is the flexibility to change coverage as financial needs change.
Whole Life Offers Security
When comparing term and whole life insurance, it is clear that term life gives policyholders more flexibility to adjust the amount of coverage they buy. However, if a policyholder becomes ill or elderly, he or she may be unable to obtain new term coverage when a current term life policy expires. Since whole life never expires and cannot be cancelled due to age or health, it provides the security of always having life insurance. The greatest advantage is that if offers long term financial security to policyholders.
Cash Value For Life
Term life insurance does not build equity value over time, but part of the whole life premiums is diverted to a savings feature with a guaranteed interest rate and return. A policyholder can use the equity in a whole life insurance policy as collateral for low interest loans with no repayment schedule. The policy remains in force and the balance of the loans is deducted from the death benefit if the insured person dies before the cash value is repaid. In a comparison, whole life can be used as a tool in planning for the future, particularly a retirement nest egg, while term life cannot.
Return of Premium Term Life Insurance
Some term policies offer a return of premiums paid into the policy if the insured person survives the term. This is not the same as the cash value of whole life insurance since it cannot be accessed during the policy term and is only paid when the policy expires. The premiums for ROP term life are higher than those of standard policies, but these policies can be used in planning for financial goals.
The disadvantages for return of premium policies are that premiums or the cash value cannot be used for loans, ROP term life insurance may have a lower return on investment, and income tax is due on premium returns when the money is paid back.
Tax Advantages
The death benefits paid by life insurance policies are not subject to income and estate taxes and this advantage is shared by both kinds of contracts. When using whole life insurance as an investment, the returns on the equity in the policy are tax deferred until they are withdrawn from the policy. Since term life has no cash value, it does not share this tax advantage of whole life coverage. If comparing return of premium term life vs. whole life insurance, there is no tax advantage attached to ROP term life because the returns are paid in a lump sum.
Financial Planning
Term insurance will provide money to cover financial obligations and provide support for dependents if a wage earner dies, but it has no other role in financial planning. Whole life can be used while the policyholder is living, but term life cannot.
Since whole insurance accrues cash value/equity, it can be used as a tool in financial planning to meet future goals like college tuition or retirement. However, if you need to pay for funeral expenses, then a burial policy like the one from Colonial Penn Insurance might make sense.
In terms of financial planning, whole life has most of the advantages since term life policies do not build cash value and simply expire at the end of the term.
Retirement and Estate Planning
The tax advantages of whole life make it an ideal tax shelter for affluent individuals for retirement and estate planning. The money in the policy can be accessed by the policyholder through loans and the death benefit can be used to cover estate taxes. Since returns are tax deferred, no income tax has to be paid on the life insurance investment. For estate planning purposes, a term life policy does not have the income tax advantages provided by a whole life insurance policy.
Term Vs. Whole Life Insurance Rates
Many life insurance websites offer rate quotes from multiple providers. To request free and instant life insurance quotes, you complete a short questionnaire and the websites provide free quotes from several companies almost instantly. It is not necessary to complete the form twice – just change the type of life insurance to get comparative quotes online.
In cost comparisons of term versus whole life insurance, term life policies always have lower rates for the same amount of coverage, but the advantages of whole life outweigh the cost for some consumers. Determining which form of life insurance is best for you depends on your personal financial goals and circumstances.
Getting The Best Coverage and Price
The best way to get the most value may be to think about complementary term and whole life insurance policies rather than term or whole life. A primary whole life policy can provide security for the insured person throughout his/her lifetime and term life insurance policies can be used to supplement as needed. Both types of coverage have advantages which can be maximized and drawbacks which can be minimized by using a combination of whole and term life insurance for protection.
A comparison of term vs. whole life insurance shows that both types of coverage have pros and cons which should be weighed before you decide which kind best meets your needs and budget. When buying life insurance, consumers should decide if the flexibility and affordability of a term life policy is more important than the security and investment potential of a whole life policy.
