whole vs term life insurance
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If you are deliberate about living and your loved ones’ well-being, then life insurance is one trigger you will have to pull. Deciding on the type of life insurance you’d be buying, however, is a bit tricky. There are a whole lot of options. However, whole vs term life insurance is the first one you will likely consider. So which of these two is most suitable for you? You will have to define your policy needs to correctly answer this question. If your life insurance need is temporary, you will go for a term policy, but if it’s indefinite, you should opt for a whole policy. If you are wondering about the difference between whole vs term life insurance, its cost, how cash value influences your policy, or how to determine a policy plan using a calculator, keep reading.

Whole vs Term Life Insurance: What Is Term Life Insurance and How Does It Work?

Term life insurance is not just relatively cheap, but also very flexible. It is perhaps one of the most common life insurance policies available in the States today. Every insurance company out there offers term life insurance. It is a type of life insurance policy that provides coverage for a certain period, which is usually a specified number of years. With this, you will get a guaranteed constant premium for a set length of time. The specified number of years depends on the policyholder, so you can have a term policy of 10, 15, 25, or 40 or more years. Additionally, the policy simply ends after the term expires or is paid out.

Both your death benefits and your insurance premiums are guaranteed to remain the same for the duration of your policy. Anyone who holds a term life insurance policy can easily renew it when the term expires. Unfortunately, this is usually at a higher rate, and the rate increases every year. That is why you need to be careful when choosing a term life plan. 

How Does It Work?

A policyholder simply buys term life insurance according to the number of years he wants and the premium payment agreement. If the policyholder dies before the term expires, then his beneficiaries will get the policy payment. If he outlives the term and desires to renew, he will have to do that at a new premium rate. Unfortunately, the rate keeps increasing as you renew your plan. 

Term Life Insurance Examples

A man named Smith Smart was diagnosed with leukemia. According to the doctor’s report, he has only about 15 years or less to live. He opted to buy a 15-year term life insurance policy, thinking he would be dead before the 15 years elapsed. If he dies within the 15-year term, his beneficiary will receive the coverage payment. If he outlives it and wants to renew the policy, it will be at a new premium.

Another typical example is a young father taking out a 25-year term plan. His initial plan is that at the time the term expires, his son would no longer be dependent on him for financial support. 

From the above examples, we can deduce two different reasons why people choose term life insurance over other life insurance policy coverage. However, both have one thing in common, “a policyholder must decide on the policy’s length and the coverage amount.”

Types of Term Life Insurance

The following are the types of term life insurance available within the States;

#1. Term Level

If you are a policyholder who wishes to go with the term level, it is only right that you know what it is and how it works. Term life insurance is one of the most common types of term life insurance. With this, you will have a constant premium payment commitment till the end of the term. It has a key distinguishing feature: the shorter the term duration, the lower your premium payment. The longer the term, the higher your premium payment. Your premiums will also increase on renewal.

#2. Convertible Term Plans

A convertible term insurance plan can be converted into another type of insurance plan, such as whole life or endowment plan, at a later date. This is most suitable, especially when you foresee an increased income in the future.

#3. Annual Renewable Term

Buying annual renewable term life insurance means you will have to renew the premium annually. Unfortunately, it is always at an increasing rate.

#4. Decreasing Term

Anyone who chooses this will get a lower premium over time. This is based on the belief that your liability increases as you advance. The death benefit reduces during a declining term policy, but the premiums remain constant.  

#5. Return of Premium Term Life

Policyholders who settle for this will be getting back their premium once they outlive their term. This sort of term life insurance is significantly more expensive than other types of term life insurance.

Whole vs. Term Life Insurance: What Is Whole Life Insurance and How Does It Work?

Whole life means it’s permanent and this lasts for as long as your payment. This life insurance is much more expensive than term life insurance. The policy is designed to last a lifetime. A lifetime here means as long as you keep up with premium payments.

It has key notable features, and these are stable premiums, death payouts, and the capacity to accumulate cash value. Whole life insurance builds cash value over time and can even provide dividends that can be re-invested to raise the death payout. As a policyholder, you may be eligible for payouts based on the company’s financial performance. The most interesting thing about whole life insurance is that its premiums are guaranteed to stay the same for the rest of your life (or rather as long as you keep up with payments), and the cash value account grows at a constant rate. Moreover, you can opt to take out the cash value as a loan if you do not want to re-invest it.

Key Features of Whole Life Insurance

Although people consider whole life insurance as a lifetime policy, it has the following feature

#1. Cash Value Life

A cash value life insurance policy is any permanent whole life insurance policy that is inclusive of cash value life. With the cash value policy, a portion of your premium goes toward establishing a cash reserve that you can access throughout your life.

#2. Payout

Upon the death of a policyholder, the beneficiary can get up to $100,000 in face value or more for someone who held a cash value life insurance policy and about $35,000 for someone who held a final expense life insurance. This figure does vary under certain conditions.

Whole vs Term Life Insurance: Key Difference

The following are the key difference between term vs whole insurance.

DurationA specified number of years within which a policyholder must not default premium payment.A lifetime and as long as there isn’t a default on premium payment.
Premium RatesChanges after terms expire.Remain the same.
Premium CostLower than all permanent life insurance.Quiet expensive and depends on the amount of payout you want.
Medical TestDepends on the insurance provider but generally, it doesn’t require oneIt requires a medical test.
Face ValuePayment is certain so long as you meet up with premium payment.Guaranteed payout.
Cash ValueDoes not include cash valueIncludes cash value
DividendDoes not earn dividendEarns dividend on cash value
Businessyield Consult

Whole vs Term Life Insurance: Key Similarities

The following are the key similarities between term vs whole life insurance

Life Insurance PolicyBoth are types of life insurance
PremiumBoth require premium payment
PayoutBoth payout face value

Which Is the Right Life Insurance for You?

Both are great insurance options and offer flexible benefits to their holders. However, the following will help you choose a policy that is the best ideal for your circumstances. 

Term life insurance is ideal for you based on;

  • You want permanent life insurance but can’t afford one in the meantime. You can simply choose a convertible term life insurance policy and switch at the due date. 
  • Once you reside within the United States, you will provide insurance coverage for other things, so if cost-effective is your goal, then term life insurance is perfect for you. 
  • If all you want is temporary coverage,
  • If you only want to avoid a catastrophic or aborted future for your loved ones, for instance, young parents who desire to see their kids finish college in the event of their death.
  • You want short-term life insurance.
  • You don’t want an investment plan.

Whole life insurance is ideal for you based on;

  • If you love the idea of cash value,
  • If the high premium cost will not affect your finance
  • When you have someone with a long-term disability,
  • You want a long-term investment.
  • You want your beneficiaries to receive a hefty payout

Getting the Best From Your Whole or Term Life Insurance

The following tips will help you make the most of your term or whole life insurance policy

  • Get quotes and compare offers.
  • Buy policy ahead of time
  • Decide the policy that best meets your needs. It doesn’t have to be whole, it can be term life insurance.
  • Determine the number of years you need.

Whole vs Term Life Insurance Cash Value

If anyone will effectively compare whole vs term life insurance, cash value must be part of that comparison. This is because whole vs term focuses on comparing these two types of life insurance and cash value, is a key factor in the whole policy.

What Is Cash Value?

In terms of an account, the cash value is generally the total amount of liquid cash in any account, available for immediate withdrawal or use. But when it comes to life insurance, it is an investment feature that is added to a permanent life insurance policy.

Cash value in life insurance allows you to earn interests with your policy. Your interest can be withdrawn or even borrowed to take care of other financial needs. 

Whole vs Term Life Insurance Cash Value: How Does It Work?

With every premium a policyholder pays, a portion of that amount goes toward insuring their lives, while the other amount goes toward building up their cash value. This cash value then accumulates interest as time goes by. When it comes to how much one can earn as interest with a cash value, it depends on the type of permanent life coverage a holder buys. Additionally, the interest on the cash value portion of your policy is tax-deferred. 

Whole vs Term Life Insurance Cash Value Withdrawal

Since cash value is the total amount of liquid cash in someone’s account available for immediate withdrawal or use, how can I withdraw cash value from life insurance? There are four ways to access the cash value of your life insurance policy, depending on the type of policy you have. These are as taking out a loan from your cash value, withdrawing, giving up the policy, and using it for your premium payment.

Before taking out funds from your cash value, check with your insurance policy to know the best way to withdraw. This is crucial because when a policyholder completely empties the money in the cash value policy, it can bring your life insurance to an abrupt end.

#1. Giving up Life Insurance for the Cash Value 

When a policyholder decides to give up a life insurance policy, it simply means he intends to cancel it completely. Most insurance providers may also charge you a surrender fee, as the case may be. Unfortunately, when you surrender your life insurance policy to get its cash value, you will have to pay income tax on the amount you receive. 

#2. Cash Value Withdrawal 

You might be able to take money out of your permanent life insurance policy tax-free. Your withdrawal, however, will be taxed as income if it exceeds the amount you’ve paid into the cash-value portion of your insurance thus far. Also, keep in mind that taking money out of your cash-value account affects the death benefit provided to your beneficiaries when you pass away.

#3. Paying Premiums With Cash Value

The last means of withdrawing your life insurance cash value is by using it to pay your premium. Rather than default a premium payment, you can re-invest your interest as a premium payment. 

#4. Cash Value Loan

If you have permanent life insurance with cash value, then you can take out a loan from your cash value to take care of an emergency. A policyholder can loan up to the exact amount in his cash value account. Should a policyholder die before completing the loan payment, then the balance will be deducted from their face value. Unfortunately, the interest on the loan will also be reduced. This simply means your beneficiaries will get a decreased amount from the initial payout.

Term vs Whole Life Insurance Cost

If you are considering a term vs. whole life insurance policy, the cost is one key element to look out for. You wouldn’t just decide to go for term vs whole life insurance without first comparing their cost against other permanent policy coverage. If all you want is a cost-effective policy in term vs. whole life insurance, you can opt for term life insurance. Why? This is because term life insurance is temporary and has no cash value. As a result, it is much more affordable than whole life insurance. Whole life insurance, on the other hand, will generate cash value for its policyholder but this is at higher premiums.  

Term vs Whole Life Insurance Costs: Pricing Options

The cost of term vs. whole life insurance is affected by several pricing options, and these differ with policy providers. The following are some of these factors.

#1. Length Of Term 

This only affects those who opt for term life insurance. Choosing a short-term policy simply means you will be paying a smaller premium. For instance, Adam and Harry are two friends who want to buy a life insurance policy. Adam chooses a 10-year plan, and Harry opts for a 15-year plan. If Adam pays a $200 premium, Harry will have to pay about a $250 premium for his policy. 

#2. Amount of Coverage

The face value you want your beneficiaries to receive will also determine the cost of your term or whole life insurance policy. This applies to both term and whole life insurance policies.

#3. Age

One of the factors that affect the cost of life insurance is age. Buying a policy plan at the ages of 25 and 45 is never the same thing. The more advanced in age, the more expensive it becomes. 

#4. Health Status

One’s health status is also a factor that affects the cost of term vs. whole life insurance. Someone who has already been diagnosed with an ailment is likely to pay a higher premium than someone healthy. You already know what this means, right? Well, your guess is as good as mine. You will have to submit your medical records to the policy provider. This is part of the requirements used in determining your premium. 

Whole vs Term Life Insurance Calculator

There are several online calculators accessible for free. Anyone can use an online calculator to know the cost of the term vs. the whole premium. To use an online calculator for your term vs. whole life insurance calculator, you will have to provide answers to some questions. For most online term vs. whole life insurance calculators, these questions are eight or more in number. The amount you will eventually pay depends on two key factors: your income and your insurance needs.

Whole vs Term Life Insurance Calculator: Online Questions

The following are some of the questions you will see in a typical online whole vs term life insurance calculator. Some of these questions already have options available beneath each question. All you have to do is choose an appropriate answer and they will tell you whether to go for a term or a permanent life insurance policy. Most often, you will be asked the following questions;

  • How do you feel about insurance that can be self-funding in the future?
  • Do you have an active IRA or a 401(k) account?
  • How much money do you already have as an investment?
  • How much have you already saved up for an investment?
  • How much do you want at face value?
  • How would you describe your investing personality?
  • What do you do with the money left after your monthly expenses? and so on.

Whole vs Term Life Insurance Calculator: Online Calculator

The following are some online calculators that you can use for calculating your term and whole life insurance.

  • Bankrate
  • Insurance geek
  • Ramsey Solution and so on

In Essence

Although whole vs term life insurance are both types of life policy, they differ in purpose. However, they still meet the needs of policyholders perfectly. So no rule reflects the exact life insurance an individual should get. It all depends on your financial capabilities as well as your insurance needs.

Whole vs Term Life Insurance FAQs

Is whole vs term the only type of life insurance?

No, they aren’t. Other types of life insurance coverage include universal life insurance, variable universal life insurance, index universal life insurance, and so on.

Is it worthwhile to buy life insurance after the age of 60?

You probably don’t need life insurance if you retire and don’t have any problems paying your bills or making ends meet. But then, keeping life insurance is a smart idea if you have retired with debt, or if you have children or a spouse who is dependent on you. It’s also possible to keep life insurance in retirement to help pay estate taxes.

What is the key disadvantage of life insurance?

The high cost of premiums is the major disadvantage that whole life insurance has.

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