Term Life vs. Whole Life: Which One is Right for You?


Life insurance is an important investment in the future of your loved ones, and it’s never too early to start considering what type of protection you need. There are benefits and drawbacks to both term life and whole life insurance policies. But how do you determine which is the right option for your needs?  Term life insurance is affordable and straightforward, but it only lasts for a certain amount of time. Whole life insurance doesn’t expire, but it is more expensive. Whole life insurance is best for people who have lifelong dependents or complex financial planning needs. Here are some factors to consider when deciding which type of life insurance is best for you. 

Term Life

Term life insurance is a simple form of coverage with a fixed duration. You may want to consider term life insurance if you want a death benefit that gives your beneficiaries money if you die while the policy is in effect. This form of simple insurance lasts for a set period, like a 10- or 20-year term. After that period of time passes, the policy expires.

The two term life insurance policies

The two types of term life insurance policies are level term and decreasing term. The level term and decreasing term refer to the death benefit amount throughout the length of the coverage. A level term policy pays out the same amount of money regardless of how far into the fixed term you pass away. This option allows you to choose a pre-agreed amount that your beneficiaries receive upon your death.  With a decreasing term life insurance policy, the amount paid out upon your death gradually declines over the fixed term. For this reason, you can often purchase a decreasing term policy for less money than a level term policy.  This option may work for you if you’re using the insurance to cover the amount of debt you owe on your car or student loan. Since you’re gradually paying down your debt throughout your life, the policy’s value is also reduced. 

Renewable term life

​​There are various life insurance policy options that include a renewable clause. A term life policy that renews allows you to extend your coverage at the end of the set term without requiring another medical exam. If, after 30 years, the coverage ends, but you still haven’t paid down your loan, or your child still lives at home, you can choose to renew the policy. You might pay a higher premium to compensate the insurance company for taking on this level of risk. But in the long term, the opportunity to continue your coverage at the end of term regardless of your health is worth the cost to most people.  You can renew both decreasing and level term life insurance policies if you choose a policy with a renewable clause. However, while your coverage remains the same, your premiums are recalculated by life insurance companies during each renewal period. 

Term life benefits

Term life insurance policies offer many potential benefits, especially for young people like new graduates or couples with young children. Since these fixed term policies provide coverage at a lower rate than whole life insurance, you can protect your family for the duration of the term, as long as you pay your premiums.  For example, if your parents signed as guarantors on your student loan, and your loan term is 10 years, you may want to take out a 10-year term life insurance policy upon graduating. Doing so ensures that your parents aren’t responsible for repaying your debts if anything happens to you. In this case, a decreasing term policy may be sufficient since the amount you owe on your loan will gradually lower over time as you make payments.  Similarly, parents of young children can benefit from a term life insurance policy with a duration that covers their kids into adulthood. Choosing a level term policy ensures that if anything happens to you at any point during their childhood, your kids will receive the pre-agreed upon amount as a death benefit. 

Term life disadvantages

A variety of factors determine the cost of life insurance policies. Most plans require you to pass a medical examination to qualify. If you have any health issues, you’ll face higher premiums or may even be ineligible.  Although you pay into the policy for the fixed term, you won’t receive any money back if you do not pass during this period. You cannot use term insurance to save money on taxes or build wealth, so there is no financial gain from paying into a term policy outside of the eventual death benefit. 

Whole Life

Whole life insurance is a type of permanent life insurance. It doesn’t have a fixed term but covers you until your death, regardless of when that occurs. It offers a cash value component to the death benefit. Since you accumulate cash value over time, you can borrow against this policy if you need access to additional finances. 

Whole life benefits

Most whole life policies are level premium. This means you pay the same amount each month for the entire policy. Some of the money is paid toward the insurance coverage, and some of it accumulates over time into a cash value, similar to a savings account You can borrow money or take out cash from your life insurance policy to pay for your child’s college tuition or repairs to your home. Loans from a life insurance policy are tax-free, but you’ll have to pay income tax on the investment gains from any withdrawals. That makes a whole life insurance policy more flexible than a term policy.

Whole life disadvantages

If you borrow from your life insurance policy, the death benefit decreases by the same amount. So, if you borrow $30,000 from your policy, your listed beneficiary will get $30,000 less if you pass away. You must pay back the loan at the current interest rate to prevent this from happening.  Whole life insurance tends to have higher premiums than term life insurance because its coverage lasts indefinitely. On average, whole life insurance policies cost between 5 and 15 times more than comparable term life insurance policies.  If you decide to cancel your whole life policy, you may have to pay a surrender charge of up to 10% of the cash value. This charge usually decreases over several years until it disappears completely.

Term Life or Whole Life: It’s Your Choice

Whether you decide to buy term life insurance or whole life insurance, there are benefits to investing in life insurance now.  Term life insurance is suitable for people who want to leave money behind for their loved ones after they die. It is also cheaper than whole life insurance.  Whole life insurance is suitable for people who have a high net worth and want to use it as an investment account in their estate planning. It’s also a good option for people who:

  • Need to pay taxes on their estate after they die
  • Want to build up cash value
  • Have children who will need financial support

Having life insurance can offer reassurance in your final days because you know you are financially taking care of your loved ones. Whether you opt for a term or whole life insurance policy, you’re investing in your family’s wellbeing.  No matter what type of life insurance you are looking for, Finance is us has information on all necessary products and services to help you find the life insurance that best suits you. Get a policy that meets your needs today.   Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.  

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