The Difference Between Term and Whole Life Insurance

The Difference Between Term and Whole Life Insurance

So, what is the difference between term and whole life insurance?  

Term life insurance policies provide coverage for a specific period of time. Common policy lengths are 10, 20, or 30 years, or until the policyholder reaches a certain age. Designated beneficiaries are only paid a death benefit if the policyholder passes away during the specified term. Premiums are usually less expensive than whole life policies because there is no guaranteed payout.

Whole life insurance policies do not have an expiration date. Therefore, beneficiaries will receive a death benefit regardless of when the policyholder dies. However, since a payout is guaranteed, whole life insurance policies are more expensive than term life insurance policies. 

Let’s review the details.

What is Term Life Insurance?

Term life insurance is so named because the policy becomes void once the term expires. The policy’s premium and death benefit are usually consistent for the duration of the term, although in some cases, the payout decreases with each passing year. Some plans simply expire at the end of the term; others include options to renew or convert to a whole life policy. 

Pros of term life insurance

Term life insurance provides financial security and peace of mind, usually during the prime working years. An unexpected death is hard enough, but without the cash infusion life insurance provides, the loss can also be financially devastating for the survivors, jeopardizing their ability to pay bills, cover basic needs, and prepare for the future. 

Fortunately, most companies offer a relatively high benefit for a low premium. Insurers can afford to do this, since the vast majority of term life insurance policies do not pay out before the term expires or converts. 

Cons of term life insurance

The No. 1 downside of a term life insurance plan is its expiration date. If the policyholder outlives the term, their beneficiaries will get nothing, and the policyholder will not have a return on their premiums. 

Some plans allow you to renew your term life policy once the term expires. Usually, though, you’ll be renewing at a higher rate. And, eventually, you’ll reach an age where no one will offer you a term life policy. 

Additionally, unlike whole life insurance, term life policies don’t build value. Because there is no cash value component to term life plans, there’s no way to access any of the money you put in. 

Tips on shopping for term life insurance

Life insurance is an important, long-term decision, so it’s wise to shop around. You can contact multiple insurance companies, or use an agent or broker to get individual plan quotes. Another option is to streamline your time and effort by working with your local credit union. If you’re wondering, do credit unions offer life insurance? The answer is often yes!  

Some term life insurance companies will require a health exam to determine premiums, but others — including many credit union life insurance plans — do not require a medical screening. However, if you opt for a plan requiring a medical exam, the good news is that insurance health exams aren’t terribly intrusive, and may qualify you for better rates. 

Finally, consider a policy that lets you convert to a permanent plan down the road. Locking in this option gives you premiums based on your current health conditions, rather than concerns that may pop up later. 

What is Whole Life Insurance?

Whole life insurance doesn’t have an expiration date. Instead, it provides the policyholder with permanent insurance, which is why it is also known as permanent life insurance. As long as you keep current on premiums, a whole life insurance policy will cover you for life.

Pros of whole life insurance

With whole life insurance, beneficiaries are guaranteed to receive a death benefit, as long as the policy is in good standing. So, unlike term life insurance, you know you’re getting something for your money. And, most death benefit payments are not taxed as income, although some estate taxes can accrue in certain circumstances. 

Additionally, whole life insurance policies build value in a way that term life insurance policies don’t. A percentage of each payment is set aside in a savings portion known as the policy’s “cash value.” Some policies let you withdraw money from the cash value account; others let you borrow from it. You may, however, have to pay taxes or consider interest on loans and withdrawals. 

Also, whole life insurance premiums stay the same unless you change your benefit amount. Your age, medical history, and coverage level all factor into your rate. So the younger you are when you sign up, the better your rate will be — permanently.

Cons of whole life insurance

High premiums are a significant downside to whole life insurance. They range from five to 15 times higher than term life insurance. 

Strategically, purchasing a whole life policy when you are young makes the most sense. However, our youth is not often a phase of life when most of us can afford the monthly premiums of a whole life policy. Or, if we have the money, we’d rather spend it on something more immediately gratifying. Therefore, by the time you have achieved the financial stability to afford the premiums or simply realize the long-term value of whole life insurance, you may have lost your tactical advantage.

Tips on shopping for whole life insurance

Whole life insurance provides opportunities for tax savings, estate planning, and retirement financing. But, different term structures and actions can trigger tax payments, and reduce the death benefit to beneficiaries. Talking to an expert about your plans is critical. Credit union life insurance specialists at your local credit union are trained to help you find the right policy to fit your needs.

Note that although the cash savings aspect of whole life insurance is very attractive, in many cases, you must use it or lose it. In addition, the cash value usually reverts to the insurance company after the policyholder dies. So, consider plans with riders that award your beneficiary both the cash value and the death benefit. 

How to Choose Between Term and Whole Life Insurance

If you’re still on the fence about whether a term or whole life policy is the way to go, consider your life situation, concerns, and goals as you make your decision.

Term life insurance is often a top choice for sole providers who have dependents. Similarly, stay-at-home parents also need insurance, as they provide invaluable household services that would be expensive to replace if tragedy struck. 

Business owners should also consider term life insurance. Because small business owners often use personal property as collateral for their loans, without insurance, their home, car, or other property could be in danger of being seized to satisfy the loan.  

While not romantic in the traditional sense, newlyweds should also consider shopping for term life insurance. At this stage, spouses often enter joint financial agreements, and the entire responsibility can fall to one partner if something happens to the other. Those with significant debts should pursue life insurance for similar reasons.  

Whole life insurance is better for those who want protection that extends beyond their working years. Additionally, these policies can help to shelter beneficiaries from estate taxes. 

The cash value feature makes whole life plans a good safety net for unexpected expenses. They act as an automatic savings account that accrues interest. Just know they’re unlikely to earn higher returns than many other investment options. So, they can be part of an investment strategy, but likely not the sole strategy. 

If you still can’t decide, some individuals choose to stack policies. They purchase the amount of whole life insurance they can afford and then make up any coverage gap with a term life policy. Just be realistic about what you can afford, since letting your policy lapse can cost you your advantageous rates and other terms. 

Further Resources on the Difference Between Whole and Term Life Insurance

Deciding on the type of life insurance you’d like is a good first step, but there are many more decisions ahead. Don’t get overwhelmed; get informed:

• Know how much life insurance you need. Cover your bases with this inclusive calculator. 
  
• Factor in the medical exam. Many policies require a medical exam. What can you expect, and how can you improve your results?
  
• Determine your beneficiary. Single? You still need to pick a beneficiary — or more than one. Here’s how. 
  
• Stay informed. Once you get your policy up and running, it’s a good idea to review it periodically to make sure it fits your needs. 

Buying life insurance may not be as instantly gratifying as finally finding that flavor of gum that lasts, but it will give you lasting peace of mind for years to come. Whether you decide on permanent whole life insurance or a policy with a temporary term, your local credit union can help. 

Did you know?

Member-owned and member-focused, many credit unions offer life insurance and other services at rates you won’t find anywhere else. While large banks answer to shareholders, credit unions are not-for-profit, so they can serve members instead of the bottom line.