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Term vs Whole Life: Understanding the Difference

Term life and whole life insurance policies have enormous benefits for individuals who want to achieve their financial goals. The two main differences between the two types of life insurance are policy length and cash value benefits.

Term life insurance is the more affordable coverage that provides a death benefit through a set term. A whole life insurance policy provides permanent coverage for a cash-value benefit and investment opportunities throughout the person's life, as long as premiums are paid. 

Let us walk you through more differences between term life insurance and whole life insurance coverage.

Comparing Term Life vs. Whole Life Insurance

Not all life insurance policies work the same way. Term and whole life insurance are the two oldest and most popular types of life insurance available in the marketplace. Let's look at each one.

What Is Term Life Insurance?

Term life insurance provides coverage for a set period of years, usually 20 or 10. Your designated beneficiaries will receive a tax-free payout called a death benefit should you die while your policy is active. The insurance company bases your death benefit on your selected coverage amount.

Term life insurance policies are generally less expensive than whole life insurance. Premiums are level, meaning these fees remain the same throughout the policy's term. Once the set period ends, the policy may expire. Sometimes, the policy renews automatically, but the rate goes up as you age.

You should consider a term life insurance policy when:

  • You need the most affordable life insurance to cover specific financial concerns, like providing monetary support for a spouse or children following your death.

  • You want life insurance coverage only for a certain time frame and don't require indefinite coverage.

The term length should match the financial obligations you must cover. For instance, if you have young children who will need support, a 20-year policy may provide the support they'd need until adulthood.  If you have teens, perhaps a 10-year policy makes more sense.

Here are some additional benefits that term life insurance provides to customers:.

  • Term life insurance has set time limits and medical requirements. The policies remain in force for a period of five to 40 years. According to the Insurance Information Institute, policyholders usually select a 20-year term. Most insurers require policyholders to provide a detailed health history and undergo a medical exam before the carriers approve coverage.

  • Your age and medical history influence the price of your term life insurance premiums. Term life companies factor in your health condition, age and life expectancy when calculating your premium rates during the application process.

  • Some term life insurance policies have options to renew your coverage for another term. When this option is available, you don't need to take another medical exam to renew the policy but your rate will increase.

  • Term life insurance uses age-based limits to determine renewal periods. For instance, life insurance carriers usually prohibit persons 80 years and older from renewing a policy. A 70-year-old who wants to renew a policy may only be allowed to renew for a 10-year term.

  • Term life insurance policies are more affordable for young people in good health. These policies increase in price as you age.

  • With decreasing term policies the death benefit decreases over the course of the term, unlike level term policies where it stays the same. Some policyholders select decreasing term policies because they are less expensive than level term life and whole life insurance.

  • Policyholders can convert some term life policies to permanent ones without taking another medical exam. There are also term policies with a return-of-premium feature, which pays a portion of the premiums back to you once the term policy ends. Unfortunately, you must pay higher premiums to receive these options.

What Is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance that remains active throughout your entire life as long as you pay premiums. This traditional type of life insurance provides a fixed-rate premium, a fixed death benefit and has a cash- value account, which grows over time.

You should consider permanent life insurance when:

  • You want to leave an inheritance to your family.

  • You want to fund a trust for each of your family members.

  • You have an estate and need money to help your beneficiaries pay off estate taxes.

  • You want a savings account against which you can borrow money.

  • You may want to cash out the account one day.

  • You want to guarantee a death benefit.

Here are some additional benefits that term life insurance provides to customers.

  • A guaranteed cash value savings account is included in a whole life insurance policy. The savings grows over time, so whole life insurance policies are an investment tool.

  • Beneficiaries receive the entire face value of the policy if your coverage is still active when you pass away. Your life insurer will subtract any outstanding loans from the cash value amount and pay out the remainder to named beneficiaries. 

  • Whole life insurance includes payment schedules for policyholders. You can pay your premiums monthly, quarterly, semi-annually or annually. The life insurance policy will provide benefits as long as your coverage is current.

Things to keep in mind about whole life insurance:

  • New policyholders must undergo a pre-qualification process. For instance, your life insurer may ask you to provide a detailed medical history and submit it to a physical exam before the carrier agrees to cover you.

  • Whole life insurance is more expensive than term life insurance because the policy covers you for your whole life.

  • Cashing out a policy often comes with a surrender fee, which decreases the longer you keep the policy active.

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Term Life vs. Whole Life: Costs

Several factors determine the cost of whole life and term life insurance premiums, including:

  • Age

  • Gender

  • Coverage amount

  • Type of coverage

  • Tobacco use

Whole life insurance and term life insurance premiums differ significantly in cost and affordability.

Term life insurance policies are the most affordable, especially for young families and single parents who need a financial safety net for their children but cannot afford a permanent policy. The average 30-year-old man can buy a 20-year term policy with a $500,000 death benefit for around $28 per month. A 30-year-old woman can purchase a term life policy for $22, since women, on average, have longer lifespans.

Whole life policies cost an average of five to 15 times more than term life coverage with the same death benefit. The average annual whole life insurance rate for a 30-year-old man is $4,314, and the average rate for women is $3,797. However, a portion of the premiums paid go into a savings account that will increase in value over time. 

Coverage Comparison for Term Life and Whole Life

The primary differences between term life and whole life coverage are premium costs and the length of coverage. Here is a quick comparison of both life insurance policies.

Features

Term Life Insurance

Whole Life Insurance

Term Length

10 – 30 years

Entire life

Cost

$25-$150 per month

$360 -$530 per month

Guaranteed death benefit

Yes

Yes

Guaranteed cash value

No

Yes

Cash value increase

Not applicable

Fixed-rate interest

Premiums

Stay the same until renewal

Stay the same

Deficits

No cash value option

Higher premiums

Pros and Cons of Term Life vs. Whole Life

Term and whole life insurance policies provide distinct advantages for customers. Here are the pros and cons each policy type provides.

Term Life Insurance

Pros

  • Term life insurance policies have more affordable premiums.

  • You can cancel a term life insurance policy at any time without penalty.

  • Term insurance policies have no hidden fees, investment risks or exclusions.

Cons

  • Coverage expires, so you will have to purchase a new policy or renew your term life insurance at a higher rate.

  • There is no savings account or investment component.

Whole Life Insurance

Pros

  • Whole life policies include a cash value that grows over time at a fixed rate.

  • Whole life insurance policies can be useful for estate planning and creating trusts for beneficiaries.

  • Whole life insurance coverage doesn't expire and lasts throughout the policyholder's life as long as the person pays the premium.

Cons

  • Whole life insurance has significantly higher premiums than term life insurance.

  • A policyholder must pay a surrender charge of up to 10% of the policy's cash value if the person decides to cancel coverage. This surrender charge decreases as the policy matures and the fee finally disappears.

Average Costs for Term Life vs. Whole Life Insurance Policies

Here are the average rates for term and whole life policies based on age.

 

Age

30-Year Term Life Insurance  Premium (Annual)

Whole Life Insurance Premium (Annual)

Male 30 

$587.20

$6,697.66

Male 40

$1017.88

$9,711.07

Male 50

$2,610.36 

$14,411.41

Female 30

$809.45

$5,905.99

Female 40

$889.13 

$8,471.07

Female 50

$1,972.61

$12,489.75

 

Methodology: SmartFinancial compiled life insurance rates from several companies and calculated the average  30-year term life insurance and whole life insurance premiums.

How To Choose Between Term and Whole Life Insurance

There are several things you should consider when shopping for term life and whole life insurance.

Use a term life policy to support your financial goals. You can buy a decreasing term life policy to pay down your mortgage if you die before your partner. For instance, a 25-year decreasing term policy can pay off the amount remaining on your mortgage if you pass away before your spouse. A 20-year term life policy can also help support your children if the policyholder dies in an unexpected event.

You can also purchase a term life policy as a way to replace income and protect your family after you pass away. To calculate how much coverage you need, multiply your pre-tax salary by the number of years your family will need to rely on this death benefit. For example, if you make $80,000 per year and believe that your family can recover ten years after your passing, you should purchase an $800,000 policy.

Use whole life policies as an investment opportunity. These policies have a savings account that can pay dividends, but the insurance company determines the amounts.

Premiums are split two ways. The life insurer uses one part of the premium for the insurance component, and the other part to build the policy's cash value. Additionally, many carriers offer a guaranteed interest rate (usually set at 1% to 2% annually). You can also choose unguaranteed dividends that may increase your return.

Other Types of Life Insurance Options

Life insurance companies also sell other policies that may provide financial benefits to policyholders.

Universal life, or adjustable life, insurance policies are similar to whole life policies. However, you can pay your premiums at any time and in any amount without risk of stopping coverage. The main downside of universal life is that the interest on the deposited savings fluctuates according to market conditions. 

Variable life insurance offers permanent coverage, however, this life insurance policies offer increased flexibility. You can invest a portion of the policy's savings into the stock market, money market mutual funds or bonds. This life insurance is riskier than whole life insurance and universal life insurance because your beneficiaries can receive a lower death benefit if your investments don't perform well.

Selecting a Life Insurance Policy to Protect Your Family's Future

Whole life and term life insurance policies are the most popular forms of life insurance coverage available on the market.

Term life insurance policies, which offer coverage for a set term, are the most affordable for single and young families. These life policies provide a death benefit that can support a family following the policyholder's death.

Whole life insurance policies, which provide coverage throughout a person's life, are permanent policies that offer a cash benefit. This type of life insurance policy is more expensive than term life insurance but has a savings account that grows over time.  

If you need to protect your family's future, you will need a life insurance policy that supports your financial goals. SmartFinancial can help you get a free life insurance quote from several reputable insurers. Enter your zip code below to get started on comparing policies to find the right one for you.

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