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The first decision you need to make when shopping for life insurance is which type to purchase: term or whole life. What’s the difference?
The short answer — term life insurance costs much less but only gives you a finite policy period, while whole life covers your entire lifetime. But there are many other differences you should be aware of to make the best choice for you and your family.
- Policy Feature Comparison
- What Is Term Life Insurance?
- What Is Whole Life Insurance?
- Premium Cost Comparison Table
- How Do I Choose?
|Term Life Insurance||Whole Life Insurance|
|Premiums||Can change over time or remain level||Remains level|
|Guaranteed Death Benefit|
|Accumulates Cash Value|
|Eligible For Annual Dividends|
Term life insurance, or temporary life insurance, is the least expensive and easiest way to buy life insurance for a defined period of time, but there can be some drawbacks. First, after the initial policy term, premiums will increase dramatically.
Second, term policies have no cash accumulation feature (unlike permanent — or lifetime — policies). When you buy the policy, you choose the term length. Standard terms are 10, 20 or 30 years. With most policies, the payout (the death benefit) and the premium (out-of-pocket cost) stay the same throughout the term. This is also known as “level term” life insurance.
- Most affordable type of life insurance
- You choose your term (finite time period), ranging from 5-30 years
- Only provides death benefits (no cash value)
- May qualify without a health examination
- Can be coupled with a permanent life insurance policy
- Most term policies are convertable to whole or other permanent life insurance
- Death benefits are normally paid to beneficiaries income tax free
Tips When Buying A Term Life Policy
- Select a term that coincides with the years you’ll be paying bills, a mortgage, college expenses, etc.
- Consider the timing: ideally, your family’s need for the payout would end just before the term expiration, i.e., your kids will be on their own, you’ll have paid off your house and you’ll have enough savings to serve as a financial safety net for your spouse.
- Buy an amount your family would need if you were no longer there to provide for them. Think of the payout as a replacement of your income.
- Consider buying a policy that is convertible into permanent insurance. Most term policies will allow you to convert to either whole or universal life insurance within a certain time frame. This could become important if your life insurance needs or health changes during the conversion period.
Whole life policies are a type of permanent life insurance that combines death benefit coverage for your entire life with a cash accumulation component (called the “cash value” of the policy).
How does cash value benefit you? The cash value grows each year, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating, and you can borrow against the cash value without being taxed. You can even surrender the policy for the cash, but in this case, you will pay taxes on any gains.
Some people choose to take money out of their policies either by surrendering them or taking out a loan once they’ve reached retirement age and the insurance protection is no longer needed.
Whole life insurance is more expensive (per dollar of your death benefit) than term life, but it offers advantages in its lifelong duration and its cash value component.
There are, however, some downsides to whole life insurance. You’re fixed into a stated death benefit and cash value schedule for life, so if you need to make adjustments to either depending on your changing financial needs during your lifetime, your policy may be inflexible.
You can learn more about variations of whole life insurance, including universal life and variable life, that you may want to consider. These are both permanent types of insurance, but each has unique benefits (and drawbacks).
- Lifetime coverage*
- Provides death benefits and a cash value accumulation
- Premiums are more expensive than term life
- Your beneficiaries get a payout no matter when you die*
- Requires a health exam to qualify, regardless of your age (some policies may waive this requirement, but your premiums will be significantly higher)
- Your health at the time the policy is issued will dictate the terms of your insurance for the rest of your life
- May take 10+ years to build up a worthwhile cash value
- You can withdraw or borrow against a portion of the cash value during the life of the policy
The following pricing estimates are for annual premiums.
|Person Covered||Policy Amount||Term Life (20-Year)||Term Life (30-Year)||Whole Life|
|Female, Age 25||$250,000||$176||$219||$1,758|
|Male, Age 25||$250,000||$150||$264||$1,967|
|Female, Age 30||$250,000||$188||$241||$2,113|
|Male, Age 30||$250,000||$217||$283||$2,370|
|Female, Age 35||$250,000||$200||$275||$2,489|
|Male, Age 35||$250,000||$229||$326||$2,915|
|Female, Age 40||$250,000||$257||$376||$2,993|
|Male, Age 40||$250,000||$296||$469||$3,598|
|Female, Age 45||$250,000||$352||$538||$3,683|
|Male, Age 45||$250,000||$430||$708||$4,484|
|Female, Age 50||$250,000||$499||$823||$4,617|
|Male, Age 50||$250,000||$648||$1,086||$5,643|
Methodology: We averaged the two lowest and two highest quotes for healthy men and women in each category. Quoting source: InsureNOW Direct.
No clue how much life insurance you should buy? You’re not alone! Read our step-by-step tips and factors to consider on how to determine your ideal policy amount.
Still not sure if term life or whole life is right for you? Here are some common life circumstances in which you’ll want to choose one type over the other. But remember, everyone’s situation is different, so you want to consider all factors.
When To Choose Term Life Insurance
- You’re on a tight budget and need the most affordable coverage possible.
- You want to keep the option of whole life insurance open but can’t afford it now. You can convert most term life policies to permanent coverage. Conversion deadlines vary by policy.
- You only need life insurance to replace your income over a set period, such as when you’re raising your kids, paying for college expenses or paying off your mortgage.
When To Choose Whole Life Insurance
- You want your beneficiaries to receive a payout regardless of when you die.
- You need to provide for a lifelong dependent, e.g., a special needs child. You can fund a trust using your life insurance payout to help pay care expenses once you’re gone.
- You want to be able to spend your retirement savings and still leave money for your heirs.
- You don’t want your heirs to have to pay hefty estate taxes or end-of-life expenses, such as funeral and burial costs. Otherwise, your heirs may be forced to sell off family heirlooms or property to pay these expenses.
We’re Here To Help
If you have questions about what life insurance product might be right for you, please ask us in the comment section below. Our team includes a licensed life insurance agent, who can answer any questions you might have.
Which type of life insurance best fits your needs?
*As long as the premiums are paid on time and the policy remains in-force
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