Life Insurance Comparison: Term or Whole Life?
Which type of life insurance should you get? Term or whole life? This article will help you compare the two and give you information about which type might be best for your situation.
In short, term life insurance is a lump sum payment that pays out at the end of a fixed term, usually 10-30 years. It provides protection in case someone dies during this period—you can usually keep coverage up to age 100! Whole life is an investment vehicle that pays dividends over time while providing benefits like coverage from loss of ability to work, illness and accidents. The payout rate on whole life is higher than on term because it does not have a definite expiration date.
You can find out more below, including how to compare term and whole life insurance and the steps to take before you pick a type of coverage.
What Is Term Life Insurance?
Term life insurance is a lump sum payment that pays out at the end of a fixed period, usually 10-30 years. It provides protection in case someone dies during this period—you can usually keep coverage up to age 100! Term life is more affordable because it does not have an investment component. You choose a term length and premium in advance. You can change or cancel your term policy within the policy's "free look" timeframe, usually ten days after you get it.
What is Whole Life Insurance?
Whole life insurance is an investment vehicle that pays dividends over time while providing benefits like coverage from loss of ability to work, illness and accidents. The payout rate on whole life is higher than on term because it does not have a definite expiration date. You can select whole life as the type of insurance when you apply for coverage. You will receive an investment statement each year showing your account balance and the amount of your yearly income (dividends). The market value of your entire policy will be used to determine how much you receive each month if you cancel your policy or complete an "in-force" transfer in death, disability or health. If your policy is surrendered, you will receive the cash value of your account.
What is the Difference between Whole Life and Term Life?
Whole life insurance can be viewed as a better deal because it pays out over time instead of just at the end. However, this depends on the rate of returns on your investment--if whole life does not grow enough to make it worthwhile, you're probably better off with term insurance. At first glance, whole life may seem like a much sweeter deal. You'll pay less every month than you would under a comparable term plan. Let's say you're 40 years old and looking at a $200,000 10-year term policy with a yearly premium of $1,000. Your premiums will total $220,000--and you'll pay it all up front. If you want whole life coverage, though, there's no way to break it down into monthly payments. You'd have to pay the entire $220,000 at one time upfront. This works out to be a little less expensive--but not significantly so. After the first three years, it's still a savings of only about $5,000 a year--meaning that in the end you probably won't come out ahead with whole life insurance.
If you live much longer than your term insurance period and your account grows significantly due to the growth of your investment value, then the real difference between term and whole life will increase.
Whole Life Insurance vs. Term Life Insurance: Conclusion
At the end of the day, there is a lot of information to consider and we understand that it can be confusing. Here are a few bullet points to highlight some of the differences:
Term life insurance costs less because it has no savings component but expires at a certain age (keep in mind that you can renew your policy if you're over 40) Whole life insurance has a savings component and lasts indefinitely unless you cancel or surrender the policy. As long as you keep your policy, you'll pay monthly premiums and receive benefits. You might also receive dividends. If you cancel your whole life policy, you will not get back any money. If you cancel your term policy, you will get back the money that you pay into it minus any withdrawals or lapses. When comparing whole life to term life insurance, a big question is how long you plan on keeping your coverage. If your plan is to keep the same policy for the rest of your life then whole life is probably a better deal because it has an investment component and therefore continues to grow over time. But if you plan on canceling or transferring out of your policy shortly after you buy it (i.e. after you purchase a home and no longer need life insurance) then a term policy may be the better deal for you.
Whole life insurance can be a pretty good deal, but only if you plan to keep your coverage for the long-term. If not, you're probably better off with term life insurance. Find out what options are available to you by comparing whole life vs. term life here.
What is Whole Life Insurance? And How Does It Differ From Term Life? (Video)
Term and whole life insurance are two very different types of coverage. This video explains the difference.
Whole Life: What's the Difference?
This video explains the difference between whole life insurance and term life insurance, and how each is designed. A good understanding of these differences helps you to make an informed decision when it comes to purchasing one or both of these types of coverage.
What's the Difference Between Term and Whole Life Insurance? (Video)
Term and whole life are two very different types of coverage. This video explains the difference between them and how each is designed. A good understanding of these differences helps you to make an informed decision when it comes to purchasing one or both of these types of coverage.
What's the Difference Between Term and Whole Life? (Video)
Term and whole life are two very different types of coverage. This video explains the difference between them and how each is designed. A good understanding of these differences helps you to make an informed decision when it comes to purchasing one or both of these types of coverage.
Whole Life Insurance: What's the Difference? (Video)
What's the difference between term life insurance and whole life insurance? And what about whole life vs.
Conclusion
We hope you've found this information helpful. For more valuable information on insurance and other financial topics, visit our site regularly.
Related Links:
Insurance Glossary: Definitions of Common Terms in the Insurance Industry
Tips on Buying Life Insurance at Different Stages of Life (Part 1) (Part 2) (Part 3) (Part 4) (Part 5)
Life Insurance Needs Increase with Age, but Should You Buy an Annuity? (Video)
Term vs.