August 18, 2021
Whole Life Insurance vs Term: Which Is Right for You?
Getting a life insurance policy is important to you because you want to provide protection for your loved ones. However, choosing the right type of insurance may be difficult.
Gaining a good understanding of the differences between different types of insurance can make the process a lot easier. Whole life, sometimes called permanent life, provides coverage for your whole life as long as the premiums are being paid. Term life insurance policies are in effect for a specific term or period of time. Both types of policies provide guaranteed benefits to your beneficiaries if you should die, but differ in cost, coverage, and some of the additional benefits. While there are a variety of life insurance policies out there, these are two of the most common plans.
To get a better understanding of whether or not one of these policies might be a good fit for you, let’s take a deeper dive into each.
Term Life Insurance
Term life insurance provides temporary coverage for the length of the policy, which is usually between 10 and 30 years. You pay premiums for a set period of time and, if you happen to die during that time period, your death benefit is paid out to your beneficiaries. If you don’t die during the term and you decide not to continue with coverage, your policy will end and you won’t receive the death benefit. One benefit of purchasing term insurance with BetterLife is that we give you the option to convert your policy to a more permanent plan during the initial term or before the age of 70, whichever comes first. Unlike some other types of insurance, term does not offer a cash value that you can borrow against.
Many people like term insurance because it’s known as the “budget-friendly” option, with less expensive premiums and coverage to protect a growing family. People who purchase term life insurance may feel a higher amount of coverage is less important once their children are grown, their mortgage is paid, and they are more secure financially.
What Happens to Term Life Insurance at the End of the Term?
Term life insurance, unlike whole life insurance, is designed to expire at the end of the term. If you outlive the initial term and decide not to extend it, the policy does not pay out any benefits. However, if you die during the term of the policy, the designated death benefit will be paid to your survivors, otherwise known as beneficiaries. As mentioned earlier, some insurance providers offer convertible policies that allow you to convert without the hassle of another medical exam. If you’d like to continue coverage but don’t have a convertible plan, you can look into purchasing a whole life or other type of policy once your term policy has expired. Be aware, though, that the premium will likely increase and a new application may be required.
Can You Cash In on a Term Life Insurance Policy?
There is no cash value in a term life policy.
Who Should Get Term Life Insurance?
Term life insurance is perfect for the individual who only needs coverage, or a certain amount of coverage, for a specified period of time. For example, someone with children may want to purchase a term life policy for the period of time that their kids are still in the house. Someone who just bought a new house or car may want a term life insurance plan to cover the length of their mortgage or car debt.
People who are interested in a more affordable premium payment may prefer term life insurance to other forms of coverage. If you purchase a level term policy, your premium will remain the same for the initial term. If you decide to extend the term on an annually renewable basis once the initial term is over, however, that premium will likely increase.
People who purchase a term life insurance policy may be able to afford more coverage because of the lower premiums. Keep in mind, though, that a term life insurance policy does not have the benefit of a growing and guaranteed cash value. However, some people take the money they save by choosing this more affordable type of life insurance plan and invest it elsewhere.
Whole Life Insurance
Whole life insurance policies offer coverage for your entire life and often come with a very appealing benefit: cash value. The drawback of whole life insurance is that they are usually more expensive to procure upfront. But the cash value that accrues can be borrowed against or cashed out when you terminate the policy. Some whole life policies provide dividends annually. If you’re looking for a policy that offers you lifelong protection with a guaranteed* death benefit, whole life may be the way to go.
What Happens if You Outlive Your Whole Life Insurance?
Whole life policies last for your lifetime as long as you continue to make your premium payments Therefore, if you continue to pay your premiums, you can’t really outlive your whole life insurance policy! Premium payments can be set up monthly, quarterly, semi-annually, or annually. Some insurance companies, like BetterLife, even offer shortened pay periods, like a one-time premium or 10-20 year payment plan.
How Does the Cash Value Work?
Whole life insurance offers a cash value benefit that is not available with term life insurance. The value in the account continues to build over time. As the policyholder, you can borrow against it as long as your policy has a loan value. However, keep in mind that borrowing from your policy will result in interest charged and will also reduce the death benefit if not paid back before your death. If the loan exceeds the cash value of the policy, your policy will be terminated.
Who Should Get Whole Life Insurance?
Whole life insurance is appealing to those looking for lifelong protection with the additional benefit of cash value, but can also afford a higher premium. The whole life policy is especially useful in estate planning, leaving funds to charitable organizations, repositioning or reallocating assets, or simply providing lifelong coverage so your loved ones are protected. Whole life insurance policies allow the insured to provide a death benefit to their family and loved ones after they’re gone.
Which Type of Policy Has a Guaranteed Death Benefit?
When comparing whole life versus term life, both offer guaranteed* death benefits as long as you continue to pay your premiums. The amount of benefit is determined when you purchase your policy and will not change during the life of the policy.
Medical Exam Requirements
Most insurance companies require a medical exam, sometimes called a paramedical exam, when applying for a new policy. This is basically a health physical and is the part of the underwriting process that determines your risk. It confirms to the insurer that what you stated on your application is correct. If health risks are found through the medical exam, this may affect your premium cost. There may be some companies and types of policies that do not require an actual physical, but they might still use medical records or a short medical questionnaire for risk assessment. Learn more about what you can expect in a life insurance medical exam and how to prepare for it here.
How Much Life Insurance Do You Need?
In determining how much life insurance you need, there are several things to consider:
- Current Income: You may want to consider 5-10 times your current income. However, this can vary with your age and future earning potential.
- Mortgage and Other Debt: If you have car payments, credit card debt, a mortgage, or other debt, consider the amount that you would need to cover your financial obligations.
- Family Obligations: If your children are young, child care is an added expense to consider. School-age children may require funds for college or further education.
- Final Expenses: Depending on the vision you have for your funeral, this can vary. According to the latest data from the National Funeral Directors Association (NFDA), the median cost of a funeral today is between $7,000 and $8,000.
- Emergency Fund: Set aside funds for a family emergency, household/auto repairs, or medical expenses.
Which Life Insurance Is Best: Whole Life vs. Term Insurance?
Life insurance is not a “one size fits all” solution. There are pros and cons to each type of plan. By understanding your needs, your financial plans, and the other things that are specific to you, you can become better equipped to choose the type of policy that works for you. Ask yourself the following questions:
- How old are you and your children? Do you have child care/school/college funds set up already?
- Do you have any other policies in place, like a group policy through work?
- Are you planning on setting up trusts, charitable contributions, or other special provisions in your will?
- Do you have a mortgage? If so, what is the amount and term of the loan? Do you have other long-term or short-term expenses?
When you have successfully answered these questions, review what each policy offers. Once you’ve determined which plan would be best for your financial and life situation, utilize our life insurance calculator to get an estimate of how much life insurance you may want to put in place to adequately protect your loved ones.
As a reminder, here are the basics of the two most common types of life insurance:
Term Life Insurance:
- Has coverage for a specified period of time.
- Has lower premiums to start, making the coverage very budget-friendly.
- Has an income tax-free** death benefit that will be paid to your beneficiaries if you pass away during the specified term.
- Has no cash value but, depending on your insurance provider, may be convertible to a whole life or other permanent type of policy.
- Is best for those who require short-term coverage during a very specific period of time.
Whole Life Insurance:
- Offers lifelong, permanent coverage, as long as you pay your premiums.
- Is more expensive upfront, but often has flexible payment arrangements.
- Has an income tax-free** death benefit
that will be paid to your beneficiaries when you pass away
- Has a cash value benefit that can be borrowed against by the policyholder.
- Is best for those who would like lifelong coverage to provide their loved ones with a financial safety net.
At BetterLife, we can help you decide on the right type of plan and the correct amount of coverage that’s right for your family. We recommend beginning the process as soon as possible so you have a higher chance of locking in the lowest premiums and best value.
Still have questions? Talk to one of our BetterLife agents to explore which options might be best for you and use our insurance calculator to help you understand how much life insurance you might need.
*Guarantees are backed by the financial strength and claims-paying ability of BetterLife.
**According to tax laws IRC Sections 101 & 7702.