Term vs. Whole life insurance
Term life insurance is more affordable and easier to understand than whole life insurance, but it will expire at the end of the term
- updated last on March 4, 2023
People who want to consider buying life insurance face some challenges regarding what type of policy to get. One of the most important decisions is whether to opt for term life or whole life insurance . If you have the same dilemma deciding on term vs. whole life insurance, then read on to learn the differences between the two, like cash value.
What is Term life insurance
Making the decision on buying term vs. whole life insurance is tricky, we will disscuss them in further detail. Term Life Insurance is one of the most in-demand types of life insurance because it is very affordable. People with low income can even afford it to secure their family’s future. It is available for a specific timeframe, like 10, 20, or 30 years.
Typically, it is for single and married couples who want to secure the future of their children. In case parents died while children are still in school, there is peace of mind knowing that children can continue studying because of the death benefit.
Parents can choose a timeframe that can last until their children finish school and reach adult age. The parents can also use the death benefits to secure payment for a mortgage if something terrible happens.
However, term life is not only for married couples with children. For married couples without children, it is still wise to purchase term life. The reason for buying term life, even if there are no children, is a retirement fund.
It is a great way to secure your future right before you both reach your retirement age. This type of insurance is suitable if you have a goal in mind. It is also better to take advantage of the opportunity to buy for cheaper rates while you are still a young couple.
What is Whole life insurance
Whole life insurance promises to stay with you during your entire life. Unlike with term life, the policy has no end date. The policy is in effect as long as you pay for premiums. The company will only cancel the policy if you fail to do your duty as a policyholder, which is to pay.
Moreover, unlike term life, whole life insurance provides a growing cash value that you can withdraw and loan in the future. Cash value is available for you in different ways depending on the insurer’s policy. One can take it as a loan or use the money earned from the cash value to pay for premiums.
What type of life insurance is best for you
When it comes to less hassle and peace of mind, whole life sounds like a great choice. It offers lesser headache to the policyholder because it will not expire. Also, one should not worry about re-applying for the policy after 10 or 20 years. It is true, but the comfort and benefits of whole life come with a high cost.
Below, let’s see if the two types of life insurance are worth the extra cost.
Term vs. Whole life insurance: Cost Comparison
Monthly price sample of whole life against 20-year term life policy
AGE | COVERAGE | TERM LIFE COST | WHOLE LIFE COST |
20 | $100,000 | $12.78 | $46.13 |
30 | $100,000 | $13.40 | $67.52 |
40 | $100,000 | $17.81 | $104.86 |
50 | $100,000 | $35.68 | $161.60 |
60 | $100,000 | $91.20 | $264.82 |
Sample rates are based on a healthy male living in Kentucky.
The above sample of rates shows a clear difference among term and whole life policy according to age. When comparing for a similar amount of coverage, you will notice that whole life is 3 to 4 times costlier than the term life.
After knowing the huge difference in pricing, it is now good to know why whole life is more expensive than its counterpart.
Term life insurance vs. whole life insurance
One can purchase whole life at any age. After getting it, then you are insured for the remainder of your life unless you want to cancel the policy. It is given that whole life is expensive. However, the amount balances over the years. The following are scenarios that will further explain it in actual life situations.
First Example: Whole life insurance
A healthy man acquires a whole life policy for $100,000 at the age of 30. He will pay $67 a month for the premium for his entire life.
After 20 years, he is now 50 years old and paid a total of $16,080 premiums. He never misses any single payment during that period. After another 20 years, the 70-year-old man now paid $32,160 in premiums. Unfortunately, he died after 20 years at the age of 90. His total premium paid was $48,240, but his beneficiaries will receive $100,000 face value of the policy.
Second Example: Term life insurance
A man in his 30 acquires $100,000 term life insurance with 20 years term for a $12 monthly premium.
After 20 years, he already paid a total premium of $2,880, but since it is a 20-year policy, then it ended. The man still wants 20-year coverage, so he re-applies for another 20-year term. During that time, he even in a healthy condition and does not smoke. The man will get approval for another 20-year term for a $35 monthly premium.
Another 20 years have passed. The man is now 70 years old and paid a total of $2,880 + $8,400 premiums. Now, he is again without coverage. The man now does not qualify for term life insurance. Therefore, he is left with very few options like the final expense policy, a type of whole life plan that is more expensive. Now, the $20,000 policy has a monthly premium rate of $148.
He died at the age of 90, and the final expense policy has cost him $35,520, but his beneficiaries will only get $20,000.
Whole life insurance vs term
In case the man acquired his whole life while he is still in his 30 and paid for premiums up to 90 years old, he only spent a total of $48,240 for his life insurance. By the time of his death, his beneficiaries will get a $100,000 death benefit. It does not include the money from the cash value as part of the whole life policy feature. The cash value earned from the policy may be used to pay for premiums.
In the case of term life, the man acquired term life in his 30 and renewed the term after 20 years and applied again for final expense has a total premium paid of $46,800, but his beneficiaries will only get $20,000 death benefit in the end.
However, if the man died at the age of 49, he paid a total premium of $15,276 for his whole life and $2,736 for term life, but both scenarios will give his beneficiaries a $100,000 death benefit.
Whole life insurance cash value
After reading the above scenarios, we learned that whole life could be expensive in the short term but very affordable in the long term. It is not the only benefit that one can get out of this type of policy. Mostly, whole life has a cash value feature similar to an investment.
The cash value’s interest rate depends on the insurer, so it is essential to compare first. Most insurance providers offer an interest rate of 2 to 3 percent. Aside from that, it will increase once the company portfolio soars high and gains more value.
Term vs whole life insurance pros and cons
The most significant advantage of term life insurance is that it is often cheaper than whole life insurance and can be purchased in specific increments. However, unlike whole life insurance, the term only covers a period (usually 10-30 years). While whole life insurance generally costs more than term due to its lifelong coverage, it also has the potential to build cash value over time. Ultimately, the decision between term and whole life insurance depends on your situation and goals.
Term life or whole life insurance which is better
The following are factors that may influence your decision to what type of policy suits you best, term life or whole life.
Want a lifetime Policy: Whole Life Insurance
Based on the above scenarios, we can say that whole life is a wise investment and security blanket. It is the best option for those aiming for lifetime coverage.
However, term life is an option if there is a rider that lets you re-apply for the term after the expiration date. At a certain age, one cannot qualify for term life, and then that will leave him/her with costly options like final expense or guaranteed issue.
Serious Health Issues: Whole Life Insurance
There are different types of whole life coverage available depending on your current health condition. Some may not have a cash value feature and costs more. However, if you have severe health issues like cancer or diabetes, then you may only qualify for a more expensive type of whole life, like the guaranteed issue.
Affordable Life Plan: Term Life Insurance
If permanent coverage is not something that you are aiming for, term life might suit you best. Term policy is cheaper than whole life. Term life costs are 4 to 5 times lower than whole life insurance with similar coverage.
A life plan when you need it most: Term Life Insurance
Many people only view life insurance policy as necessary during a specific stage of their life. For instance, if you are a newly married couple, getting term life will protect your family from unforeseen events. It will give your spouse and children protection against financial burden if something tragic happens to you. Once your kids mature and finish their studies, your death will have a negligible impact on the family financially.
Term or whole life insurance for seniors
The decision to choose between term life insurance and whole life insurance can be a tough one, especially for seniors. While term policies tend to be more affordable, they only provide coverage for a fixed period. On the other hand, whole life insurance is more expensive but offers lifelong protection and allows policyholders to build cash value over time. It ultimately depends on your individual needs and circumstances. We recommend consulting with an experienced insurance agent to help you make an informed decision.
Term vs whole life insurance calculator
A life insurance calculator is a tool that can help you determine how much coverage you may need based on various factors such as your income, debts, and other expenses. It works by considering your financial needs and providing an estimate of the amount of life insurance needed to cover those needs in the event of your death. Using this calculator, you can make informed decisions about the type and amount of life insurance coverage that’s best for your situation.
Frequently Asked Questions
Which is better life insurance whole or term?
The answer depends on your individual needs and financial goals. Whole life insurance offers permanent coverage with a cash value component but can be more expensive. Term life insurance covers a specific period, typically at a lower cost. Evaluating your current situation and plans is essential before deciding which type of policy is right for you.
Why would a person choose term life insurance over whole life insurance?
A person may choose term life insurance over whole life insurance if they are looking for temporary coverage for a specific period, such as to cover mortgage payments or ensure that their children can afford college. Since term policies expire at the end of a fixed term and have no cash value, they are typically less expensive than whole life policies, which offer permanent coverage and an investment component. Whole life insurance is usually more expensive but may be a better option for those looking for long-term coverage or as part of an estate planning strategy. Ultimately, deciding between these two types of policies will depend on your financial goals and needs.
Is term life insurance better than whole life insurance?
It ultimately depends on what you’re looking for in an insurance policy. Term life insurance generally provides a higher coverage amount for a lower premium but only covers you for a specific term (e.g. 10 or 20 years). On the other hand, whole life insurance offers lifelong coverage and has a savings component with cash value that can be borrowed against or withdrawn later. Consider your needs, preferences, and budget before making a decision.
About Coach B.
After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.
In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.
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