It's a new year and time to get your finances back in order. It's also the perfect time to think about life insurance, whether you are shopping for a new life insurance policy or are reviewing your existing life insurance policy to update your coverage. It’s important to know the difference between term vs whole life insurance to determine which type best suits your needs.
As with any other type of insurance, like homeowners insurance or auto insurance, there are variables in life insurance, including the debate between term versus whole life insurance. Whole and term life provide benefits that can be of advantage to the individual depending on their age, if they’re married, if they own a home, how long they want to be insured, their financial worth, and a number of other variables.
The best place to start is to understand not only the pros and cons of whole life insurance and term life, but the different aspects of each.
Whole Life Insurance - How It Works
- The Pros
- Whole life insurance provides both death benefits AND a cash value, which occurs as a result of the insurance company’s investment (bonds and money-market instruments or stocks) from a portion of your premium. You can borrow against this value and may receive tax benefits as well.
- The death benefit and premium remains consistent over the term of the policy.
- After you’ve paid against all outstanding premiums, the policy will remain in affect until the time of death.
- The Cons
- You’ll typically pay a higher premium with whole life versus term life insurance.
- You have no control in knowing how much of your premium is going towards your insurance and how much is dedicated to an investment, which builds on your cash value.
- You have no control over how the insurance company decides to invest the portion of your premium. Since the stock market is a lot more volatile these days, your cash value could also be affected. If you still have questions about this, you may want to talk to your financial planner (ask to have them run an internal rate of return to compare it with other investments) in addition to your insurance agent.
- You may not see any returns from your cash value for a decade or more, even if the investments have been sound.
The Types of Whole Life Insurance
- Traditional – This guarantees a minimum sum of the return on your investment.
- Interest-sensitive – This is not recommended at this time, because of the low level of economic growth, since your death benefit is based on a variable interest rate, going up during a booming economy and going down during times of recession.
- Single-premium – This is designed for those with a high level of income who can afford to pay the entire life insurance premium all at once. It provides a cash return, which is tax deferred.
Term Life Insurance – How It Works
- The Pros
- The first reason why individuals and married couples, including those under age 40, go with term life insurance is it can be significantly less expensive than whole life.
- Term life came from the flexibility this type of insurance provides, meaning, you can determine how long you want your policy to exist—from five to thirty years—and pay premiums based on its duration.
- You may have the option to renew a policy if it expires and you want to retain coverage. Be aware that your premium may increase, but even at an advanced age, you may still be able to obtain coverage versus being denied a new term life policy.
- The Cons
- You receive no cash value from you term life policy.
- If your policy reaches the end of its term and you do not renew within the allotted time, all the money you paid out for life insurance will not result in any death benefits.
The Types of Term Life Insurance
- Level Term – The more popular type of term life policy, the death benefit remains consistent during the life of the policy.
- Decreasing Term – The less expensive of the two types, the death benefit decreases as the policy reaches the end of the term limit. This typically occurs year by year.
Other Considerations – Term vs. Whole Life Insurance
When comparing whole life versus term life insurance, the best plan of attack is to take into account how much life insurance you need for you and/or your family and the length of your desired policy in comparison to how much you can afford.
When consulting with your insurance agent, it is also important to ask:
- Does the life insurance premium fluctuate or remain the same throughout the term of the policy?
- If you choose to renew, will you be required to undergo a doctor’s physical?
- If you choose to start with a term life policy, can you convert it into a whole life policy in the future?
Find out which works best for you, whole life insurance or term life insurance. Get your free life insurance quotes today!
