Term Life vs. Whole Life

Evaluating term life vs. whole life insurance is like comparing a truck and a car.  Yes, both are automatic vehicles that go from place to place on four wheels. But the real comparison is in what these items do; one’s primary purpose is to carry passengers, and the other’s is to carry cargo. This is true when considering term life vs. whole life as well; yes, both are types of life insurance that offers protection in the event of death, however, both go about providing this protection in different ways.

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What is Term Life Insurance

Term life insurance provides simple death benefits as long as the premiums are paid on a policy for a set period of time. When the term of the contract expires, the life insurance and premium payments cease, and coverage must either be renewed or will lapse. Because term life insurance covers short periods of time, the risk to the insurance carrier of the policy holder dying is smaller, and because of this premiums for term life insurance are usually inexpensive; especially while the insured is young. Also, the simplicity of a term life plan means that it can be managed efficiently, which helps to keep service costs and fees down and reduces the premiums.

There are three types of term life insurance.  One type is level term life insurance, where the premium is predetermined for the duration of the policy, such as 5, 10, or even 20 years.  Most term life insurance policies do not have terms longer than 30 years.  Another type of term life is annual renewable term, which can be renewed every year or period, but the premium increases correspondingly as the insured ages.  The final type of term life insurance is decreasing term, where the death benefit consistently decreases as the policy holder gets older.

What is Whole Life Insurance

Whole life insurance provides life insurance protection for the life of the insured provided that the premium payments are met.  Premiums can be paid monthly, quarterly, yearly, or in the form of a single premium whole life policy, which requires one large initial premium payment to keep the policy in effect for life.  Whole life insurance also features a savings component that is designed to build cash value and act as a retirement planning tool or estate management vehicle.

Traditional whole life insurance is one of the three main types of whole life.  Traditional whole life features fixed premiums and death benefits for the life of the insured.  The savings feature of traditional whole life policies has the added benefit of a minimum guaranteed cash value that is invested.  The gains on this investment can be used to pay down the premiums on the policy, to increase the death benefit, or to be withdrawn as cash.

Universal whole life is similar to traditional whole life, but offers flexibility in the amount of premiums and the death benefit amount.  The cash value accumulated in the account earns interest, and gains can be utilized to pay premiums, to borrow against, to offer as a surety bond, or to take as cash.

Variable whole life insurance has a fluctuating cash value because the entire cash value is invested in more aggressive financial vehicles.  When the investments perform poorly, the policy’s cash value will perform correspondingly.  However, when the market and investments do well, the cash value in the account can grow quickly.  Variable whole life accounts require that policy holders direct the investments in the account, and therefore this type of policy requires some knowledge of investment strategies.

Why Purchase Term Life Insurance

When considering term life vs. whole life insurance, a rather simple question should be asked: how long is the insurance needed for?  If the answer is anything less than 20 years, then term life insurance is probably the best policy to purchase.  Term life insurance is especially useful to growing families that need inexpensive life insurance during crucial times- such as when children are very young. Because term life policies do not have the expenses of maintaining savings and investment vehicles and riders for other types of protection, premiums are low enough that most people can easily afford them when weighed against the protection they afford.

Term life insurance should be considered by young, single adults with no dependents who are at practically any stage of life.  Young executives, college or grad students, and those engaged in political or charitable work should consider purchasing term life insurance to help offset debts, bills, and final expenses that might otherwise be left to family members to pay.  Trusts can even be set up that direct death benefits into educational accounts for siblings or charities.

Term life insurance is a wise investment for stay at home mom’s and dad’s that don’t earn income but do provide valuable child care services.  Likewise, older persons that have assumed child care roles in the event of an ill or injured adult should considering protecting the children by purchasing term life insurance to cover the period that they will be providing child care.

Why Purchase Whole Life Insurance

Whole life insurance is an excellent purchase for those who are well established and can afford the higher premium and need life insurance for the rest of their life.  Whole life insurance is vastly different from term life in that whole life insurance policies always pay death benefits if the policy is kept in effect; while term life policies rarely pay out.  This means that more premiums must be paid to help offset the cost of the guaranteed death benefits of a whole life policy.  However, a great deal of the cost of whole life premiums derives from the savings feature of the policy.

For those individuals who are seeking a tax sheltered investment vehicle, a whole life policy is a wise choice. While returns from the investment of the cash value of the policy may not be as high as investing the entire premium in mutual funds or aggressive growth accounts, the accumulation of cash value works in conjunction with the provision of life insurance, so there is added value to the policy overall. Cash value builds tax deferred, and death benefits are tax free as well. For this reason, a whole life policy makes sense for someone that is seeking an effective method of retirement and estate planning.

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