Whole Life vs. Term Life Insurance: What’s More Affordable?
What if you had too many options when it came to protecting your family?
Believe it or not, that’s sometimes true when it comes to choosing a life insurance policy. There are multiple options available, and it’s often difficult to understand the benefits of whole life vs term life insurance.
The good news is that the guide below will walk you through the key differences between term and whole life insurance. What are the pros and cons of each, and how can you pick which one is best for you? Keep reading to find out.
Understanding the Basics of Whole Life and Term Life Insurance
If you’ve never purchased this kind of coverage, you might not realize just how many policy choices you have. There are many life insurance types available, but the primary ones are term and whole policies.
Before you decide which is best for you and your family, you need to know more about how each of these policies works. Below, you’ll find everything you need to know before getting life insurance quotes from a carrier.
How Term Life Works
Term life insurance is one of those rare kinds of policies that is very straightforward. As the name implies, this coverage stays in effect for a fixed period of time. Should you pass away at any point during this term, your designated beneficiaries will receive the specified death benefit. However, if you pass away after the term has expired, your beneficiaries will not receive anything.
Typical terms for such a policy are 10, 20, and 30 years. Many prefer such policies because they allow customers to lock in both a premium and a death benefit for the entirety of the term. Plus, it’s possible to take out multiple policies that are timed to specific events. For example, you may want to get a 20-year policy when you have 20 years left on your home mortgage, ensuring your spouse can pay off the house if you pass away during those two decades.
How Whole Life Works
Permanent coverage is not restricted to a specific length of time. As the name indicates, such a policy is designed to offer financial protection for the entirety of your existence. Generally speaking, permanent coverage policies are more expensive than term policies because the coverage matures later in the customer’s lifetime. While that may seem intimidating, an essential benefit of such coverage is that it builds up a cash value over time.
As that cash value builds over time, it’s possible for you to take out loans against it or even withdraw money when you need it. That may provide peace of mind because you will always have an easy way of getting money when you need it. However, it’s important to pay back what you borrowed because your policy’s benefit will be reduced if you do not.
The Pros and Cons of Whole Life and Term Life Insurance
Now that you know the basics of each type of policy, you’re one step closer to discovering which one is best for your needs. However, it’s impossible to finalize that decision without understanding the pros and cons of both policies.
What are the benefits and drawbacks of these policies?
Pros and Cons of Term Life Insurance
The biggest benefit of term life insurance is the ability to customize it to your specific needs. For example, if you want coverage for the exact value of your house that will last until the mortgage is completed, it’s easy to make that happen. You can also take out multiple policies as needed, allowing you to customize coverage and protection to your major events. Finally, a term policy is typically cheaper than a permanent coverage policy, which is great for those on a tighter budget.
The primary drawback of term insurance is that it is limited to a specific period of time, meaning you won’t be protected for the rest of your lifetime. So if you die after the policy is over (for example, you get a 20-year policy and die 21 years later), your beneficiaries receive nothing. In such a scenario, you will have paid for no benefit, as these policies do not accrue cash value over time.
Pros and Cons of Whole Life Insurance
The biggest benefit of a whole life policy is that you will be covered for the rest of your existence as long as your premiums are paid on time. While the exact benefit is subject to the exclusions and limitations of your policy, you can rest assured that there is a guaranteed payout. Your plan’s value will steadily grow over time, and the premiums you pay will remain consistent.
As for drawbacks, the lack of term limits can be a double-edged sword because some people only want or need coverage for a limited period. Otherwise, the only other major drawback is that these policies tend to be more expensive than term life policies.
The Cost Differences Between Whole Life and Term Life Insurance
As noted above, term life policies are typically cheaper than permanent coverage policies. Sometimes, the difference is very significant. For example, a 20-year-old nonsmoker with a $500,000 term policy may expect to pay an annual rate of about $745. The same person with a permanent coverage policy with the same value can expect to pay an annual rate of $3,005.
Other factors affect the overall cost. For example, women will almost always pay less for policies than men. Age and health condition are other important factors, but those of more advanced age are not too old for life insurance. However, it’s worth considering that the cost of the policy shouldn’t be the only thing that factors into your decision, especially because whole policies accrue value over time.
The Investment Aspect of Whole Life Insurance
The longer you pay into your whole life policy, the more its cash value will accrue. It’s worth considering whole life insurance an investment in your future. For example, should you need quick cash at any point, you can always make a withdrawal. You can also get a loan against your policy, which is often a more affordable option than bank loans.
For most customers, those are the primary uses of the cash value of their whole policy. But for those who plan on leaving a significant estate to different beneficiaries, the accrued cash value may serve as a tool to facilitate estate planning.
Who Should Consider Term Life Insurance?
In general, term life is the best choice for those who want the most affordable coverage. It’s also great for those who don’t want or need a policy that accrues cash value (especially if they plan to invest that money elsewhere), which makes it a great life coverage policy for small families.
By definition, term policies are best for those who only need coverage for a specified length of time. Finally, these policies may be the best choice for those who ultimately intend to get permanent coverage later (like when they can afford it) but want protection in the interim.
Who Should Consider Whole Life Insurance?
Because they are more expensive, permanent policies may be the best choice for those with enough disposable income to afford them. These policies are also great for those who want the peace of mind that comes from a lifetime of protection.
Additionally, whole policies may be an ideal choice for those who want or need the additional cash value the policy accrues. Those who have constant dependents may want to choose this policy because it will be easier to set up a trust that can protect the dependent even after the policy pays out.
Get Started Saving On Life Insurance
As you can tell, term life is more affordable than whole life insurance. At the same time, permanent coverage policies offer additional benefits that may be worth it for those who can afford them. Do you know who can help you find the most affordable coverage, no matter which policy you choose?
At Cost-U-Less, we specialize in all types of insurance. Ready to give your family the protection they truly deserve? Call us at (800) 390-4071 or get a fast coverage quote online. You can also find a Cost-U-Less office near you.
