Whole Life vs. Term Insurance: What Are the Differences?

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Whole Life vs. Term Insurance: What Are the Differences?

Insurance plans are highly beneficial to people looking to protect their family, themselves, and their assets/property from financial losses or risks. The history of insurance dates back to at least 4,000-3,000 BCE. In North America, the first insurance company was organized in 1752 by Benjamin Franklin.

Today, approximately 106 million American adults lack life insurance (or adequate coverage), which puts a financial risk on their families in the event of their passing. There are a number of different types of life insurance. In this blog post, we will highlight two of the most popular options: term life insurance and whole life insurance.

Here, we will pit life vs term insurance against each other and provide you with all of the information you need in order to make an informed decision. We will highlight the definition of both and also share the benefits and drawbacks of both. Let’s get started.

What Is Whole Life Insurance?

If you are interested in choosing a form of permanent life insurance, then whole life insurance is a great option. Compared to term insurance, it is designed to last a lifetime and there is a guaranteed payout, regardless of when the holder dies. It is also more expensive than term life insurance.

A whole life insurance policy has a cash value component; a portion of the holder’s premiums are paid into the account, which grows over time. Holders are able, once enough cash has been built up, to surrender the policy for cash or borrow against the account.

With this type of policy, premiums remain the same as long as the holder lives and the cash value continues to grow at a fixed rate. In many cases, life insurance policies are what’s known as “participating” policies. This means that the holder may earn based on the company’s financial performance.

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What Is Term Life Insurance?

As the name suggests, term life insurance covers the holder for a fixed period of time rather than for the rest of their life. This may be for 10, 20, or 30 years, depending on the preference of the holder.

If the holder dies during the term agreed upon, the policy will pay out. However, if the holder outlives the term, their beneficiaries will not receive any money.

With term life insurance, the chosen length of time depends on the financial obligation that the person wishes to cover. For example, many new parents choose to get a term life insurance policy to cover the time their child will be financially dependent on them (approximately 20 years).

It’s a stripped-down form of insurance and, as noted, is less expensive than whole life insurance.

Benefits of Choosing Whole Life Insurance

In most cases, whole life policies are “level premium”, which means that the same monthly rate is paid for the length of the policy. These premiums are then split in two ways:

  • The first part goes to the insurance component
  • The second part helps to build the cash value (which grows over time)

Depending on the provider, the interest rate will differ. Many providers offer a guaranteed rate, which is typically around 1% to 2%. Other companies, however, sell the aforementioned participating policies, with unguaranteed dividends that can increase the total return.

To summarize, the benefits of choosing whole life insurance include:

  • It never expires
  • Premium policies stay the same
  • Policies build cash value
  • Policies can ear dividends

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Benefits of Choosing Term Life Insurance

Term life insurance is a straightforward type of insurance and easy to understand. Because term life insurance is finite and simple in nature, it is an affordable option for people seeking life insurance. If you are simply seeking to protect your family for a specific period in the case of your death, it is most likely the best fit.

Let’s give an example of the cost of cover with term life insurance. A 30-year-old male seeking a 20-year term policy with a death benefit of $500,000 will pay approximately $27.42 per month. A 30-year-old female would pay approximately $21.74.

Drawbacks of Whole Life Insurance

The cash value and death benefit are not completely separate features with a whole life insurance policy. This means that if the holder takes a loan from their policy, their death benefit will decrease if they do not pay it back.

To give an example of this, let’s imagine that the holder takes out a loan of $20,000. If the loan is still outstanding, the holder’s beneficiaries will get $20,000 less (plus any interest that is due). 

Drawbacks of Term Life Insurance

Term life insurance is, of course, temporary so there is no guaranteed payout. There also isn’t any cash value with this type of policy.

There is also a lower upper age cap with term life insurance compared to permanent life insurance. The specific age limit will vary from provider to provider, though people over the age of 60 years may find that they are unable to longer terms (such as a 30-year policy).

Whole Life vs Term Insurance: The Bottom Line

The bottom line here is that both whole life and term insurance are excellent options, though the most suitable option will depend on a person’s circumstances and preferences. We recommend that you speak to an insurance provider today to learn more about what is best for you.

Like this blog post on life vs term insurance? Be sure to check out our other informative articles on a wide range of interesting topics.