Life insurance is there to provide income for your family when you die, which is why it’s important to know and understand the different life insurance options available to you. The two most common, and debated, forms of life insurance are term life insurance and whole life insurance.
Be sure you understand the ins and outs of both kinds of life insurance policies, and get multiple life insurance quotes before making your purchase.
Life insurance is one of the most important investments you can make for the future security of your family. It is the best way to ensure they have the money they need, regardless of what happens to you. When you’re shopping for life insurance, it can be a confusing process. There are several different types of insurance coverage and hundreds of companies you can choose between.
Have you considered how much life insurance you need? Sometimes the amount itself is the determining factor!
This article is going to explore the advantages and disadvantages by comparing term and whole life insurance policies. Each plan is an excellent option or insurance coverage, but every family is going to need different types of coverage based on their needs. It’s vital you understand all of the options for insurance coverage.
Comparing Term vs Whole Life Insurance: Which Is Right For You?
The truth is, as much as most of us don’t like whole life, there really are situations where it’s needed. They’re just far and few between. Either way, let’s take a look at each type so you can evaluate your own situation.
Term Life Insurance
Term life insurance is a policy with a specific end date. As long as you pay the monthly premium, your policy will remain in effect until you reach the policy end date.
Common terms include 10, 15, 20, and 30 year life insurance policies. When the end of the term is reached, you may or may not have the ability to renew, depending on the company, your health, and other factors. If you are able to renew your insurance policy, the premium will typically be higher because the policy will extend through an older age.
Pros and Cons of Term Life:
- Lower premiums. Term life insurance is usually the least expensive policy.
- Full payout. Another advantage is the beneficiary will receive the full amount of the policy if you die within the term.
- Term limit for policy. Term life insurance policies are just that – for a set duration of time, often ranging from 5-30 years. The positive aspect of the term limits is knowing how much your policy rates cost. The downside is you may not be able to renew, and even if you do renew once the term is up, the cost will most likely increase.
- No cash value. Another downside is, unlike whole life insurance, you won’t build up cash you can borrow against down the road.
Whole Life Insurance
Unlike term life insurance, which has a specific expiration date, whole life insurance is guaranteed for the life of the insured person. Also known as permanent, or cash value insurance, whole life insurance premiums will never increase because you age.
Pros and Cons of Whole Life:
- Stable premiums. One of the biggest pros to whole life insurance is you’ll never see an increase in your premium. What you pay today is what you’ll pay 20 or 30 years from now. And as long as you continue to pay your premiums, your beneficiary will receive the benefits upon your death.
- Cash value. Whole life insurance also has a cash value. You gain interest as the cash value increases. Interest growth is tax deferred, meaning you don’t pay taxes on the income while it remains in your policy. If you cash out your whole life policy you will pay taxes for any cash amount above what you put in.
- Higher premiums. One downside to whole life insurance is the premium is usually higher than term life insurance, and can stop a lot of people from getting life insurance.
What about life insurance as an investment? Some people claim whole life insurance is a better option than term life insurance because it has cash value and can serve as an “investment.” In most cases, whole life insurance is not a good investment, despite what some people may tell you. But there are a few scenarios where it makes sense.
These are the two main types of insurance coverage you can choose between, but inside of these two types, there are several other variations where each has different benefits. For example:
- Universal
- Variable
- Indexed
- Survivorship
There is no “one-plan-fits-all” which will work for every applicant. You will need to explore all of the options and weigh them based on your life insurance preferences. Regardless of which type of plan you choose, it’s important you give your family the coverage they will need. Having a less than perfect plan is much better than having no life insurance coverage at all.
Getting Affordable Insurance Coverage
Regardless of which type of life insurance you choose, either whole or term, it’s important you get the cheapest premiums available. There are several ways you can get affordable insurance premiums. Making a few changes could save you hundreds of dollars on your insurance coverage.
The first thing you should do is cut out any tobacco you currently use.
If you’re listed as a chewing tobacco user or a smoker on your application, then you should prepare to see much higher monthly fees for your insurance protection. In fact, smokers are going to pay, at minimum, twice as much for life insurance versus what a non-smoker would for the same sized plan. If you want to save money, it’s time to kick those cigarettes, once and for all.
The next thing you should do is improve your overall health.
Before the insurance company accepts your application, they are going to require you to take a medical exam to determine how much of a risk you are to insure. The better your health, the better your insurance premiums are going to be.
If you want to save money, it’s time to start going to the gym and skipping the extra dessert. A healthy diet and regular exercise are both excellent ways for you to lose weight, lower your cholesterol, and reduce your risk of being diagnosed with severe health complications. Lacing up those running shoes could cut your insurance premiums in half, which means more money in your pockets.
The best way to ensure you’re getting the lowest premiums is to get lots of insurance quotes before you decide which one is going to work best for you. Every insurance company is different, which means you could get drastically varying rates depending on which company you get the quote from.
Getting several quotes will ensure you’re not paying more for insurance coverage than you have to! You wouldn’t buy a car without test driving a few first, would you?
Instead of wasting your time calling dozens of companies yourself, let one of our independent insurance agents do all of the hard work for you. Unlike traditional agents, we work with dozens of highly rated companies across the nation, which means we can bring all of the lowest insurance premiums directly to you, without the hassle of having to call the companies yourself. Working with an independent insurance agent can save you both time and money on your life insurance search.
Life Insurance Can Protect Your Loved Ones
When comparing term and whole life insurance policies, the bottom line is life insurance in any form can help protect your family in the event of your untimely death. When considering how much life insurance to buy, consider the costs of any debt you may have, including a mortgage, consumer debt, medical bills, etc. Then factor in additional living expenses for your spouse and family.
Contact an insurance agent or financial professional for life insurance advice or to learn more about term life insurance versus whole life insurance, and more specifically, which one is best for you and the needs of your family. Be sure to shop around for insurance policy quotes before making a purchase; life insurance rates may vary widely from company to company.
We have years of experience working with all kinds of applicants across the country. We know deciding which policy type works best for you can be a confusing process, but it doesn’t have to be. We can walk you through the process to ensure you’re getting the best protection for your family.
We know nobody wants to think about his or her own death, but not planning for the inevitable is one of the worst mistakes you can make for your loved ones.
If something tragic were to happen to you, and you didn’t have life insurance, your loved ones would be left with all of your debts and other final expenses. Losing a loved one is never easy, but being responsible for a mountain of debt is going to make the process more difficult. Because you never know what’s going to happen tomorrow, you shouldn’t wait any longer to get the insurance coverage your family will need.
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kt says
i wouldn’t invest in whole life insurance because it is so hard to perform due diligence and calculate a margin of safety. But thats just me, there are many people who do not have this difficulty
Robert says
While I know whole life insurance is not sexy, it can be a good alternative to diversification of assets. Plus there are benefits if you use the cash value correctly.
For example, if you have a policy that has a cash value of $50000, you can start acting like your own bank. If you do not touch the cash value, you do not have to pay any capital gains. If you want to by a car, put in a pool, or anything else, you can borrow the money and pay it back to yourself in installments with interest.
There are pros and cons either way. However, I am okay with whole life insurance.
fredct says
Whole life insurance is an a bad choice for almost everyone. The costs are high, the returns are confusing, and the salespeople’s big commissions cause many of them to not care whether it’s right for you or not.
The problem, basicmoneytips, is that the benefit you named (lack of taxes) can be achieved just the same through a 401(k) or IRA, without all the downsides & fees of Whole Life.
The only people who should even begin to consider whole life are those who are already maxing out both their IRA and 401(k)s, or any other tax deferred/tax free investment options.
Even then, most whole life policies are too high cost to be worth bothering with, and you’d need to really shop around, but only the very few should even get to that point anyway. If you *are* one of those few and wish to consider it, remember that it doesn’t make any sense to avoid $1 in taxes by paying $2 in commissions & fees to an insurance company.
Miranda says
We got whole life insurance policies when we were young and naive. Luckily, they were relatively small and inexpensive. We still have those policies, since they aren’t too bad, and they will provide us with needed coverage for longer than term life. But the bulk of our insurance is in term life, which we bought recently, and for 30 years. We’re adequately covered, and ultimately I am glad we have a bit of a mix (unless that’s just rationalization for a silly choice). Great post.
Jenna says
Interesting topic. Got me thinking – any chance you have some pointers for those starting off in researching life insurance?
Ryan says
Jenna, my advice is to first determine how much life insurance you need, get multiple term life insurance quotes, then buy the best policy that meets your needs from a reputable life insurance company.
Money Smarts says
I just recently bought term life insurance – 20 year term – 500k, for less than my cable bill for a monthly payment. It just adds a peace of mind, especially when you have others in the family to provide for, that you’ll be covered in case the worst happens.
I say always term and invest the rest.
fredct says
Agreed, Money Smarts.
I recently saw an ad for Whole Life insurance in the magazine. If you read the fine print, it said the graph of return was based on a ~$7200 annual premium, which is around $600 month.
After 30 years I think they showed you’d have something like $250K in cash balance. But what would you have if you signed up for 30 year term for < $100/month, and stashed that $500+/month elsewhere? $180K if you put it under a mattress.
If I pull up a compounding calculator for $7200 annual contributions at 3% interest, I get over $360K. That's a rate you can almost certainly get in a Roth for CDs or other 'stable value' investments.
fredct says
Whoops, immediately realized my error. The $500 *extra* per month is $6000 per year, not $7200. But that’s still $300K after 30 years.
The point is not to be impressed by graphs and big numbers. For what they charge, the return is usually pretty bad, and you’re better off going elsewhere.
(Also, a Roth would be tax free at withdrawal, while the life policy would be tax deferred, but not tax free when you’re done)
Jenna says
Thanks Ryan. Will be researching this now.
[email protected] says
In response to the 2 drawbacks of term life that you have underlined here, I would like to let your readers know that:
1. There are term life policies in the market that give you the option to renew or convert your policy. In the former case, you can renew your term life policy for the same number of years, at the end of the term. In this case, premiums are set in advance for the insured’s age at the time of renewing the policy. In case of the option to convert, the insured can convert the policy to a permanent one when the term ends. Both options don’t require you to prove insurability, which is a great boon.
2. Term never builds up a cash value. However, a variant of term called Return of Premiums has found favor with those who would like to benefit monetarily from a term policy. If you survive the term on a ROP policy, all premiums are returned back to you without any deductions. Of course, a ROP policy costs more than a regular term policy, but the cash benefit at the end of the policy makes it worth it.
Denise at AccuQuote
Disclaimer: I work for AccuQuote and this is my personal opinion.
andy says
very informative….now i know the difference, advantages and disadvantages…thanks!
Melissa says
I am looking into getting Life Insurance now. This has been very helpful!! I am 23 and just got married. I am thinking about getting a “bigger” life term policy and then maybe a smaller whole life. Is that a good idea? Or should I just get a term life policy?
Ryan says
Melissa, life insurance is one of the best purchases you can ever make. As for buying term or whole, go with whichever you believe is the best value for your needs. Personally, I chose to only purchase a large term life policy for myself, and I do my investing through Roth IRAs, my employer sponsored 401k plan, and other investments. You may decide your needs are different.
Daniel bennett says
Do you really have the discipline to really ” invest the difference?” I know few that do. I’ve had a whole life policy through northwestern mutual for 30 years (bought it when I was 24) and did a little financial calculations. 5.6% rate of return. Tax free? Not bad. And I didn’t have t worry about the roller coaster market….. Now my investments did a little better but that’s what they were intended for. My life ins was for safety inv with a decent return ( 2 maybe 3 companies have this I believe). Bottom line, I paid for my daughters wedding and bought an RV and didn’t have to take them out of my retirement intended investments. And didn’t pay taxes when I took the money out. My buddy bought a whole life policy through a company I won’t mention and had a 2.5% return. So do your homework and buy from the right company if the product is right for you. Worked well for me
fredct says
I, for one, absolutely do have the discipline to invest the difference. I save & invest everything that I can. I know that a lot of people don’t by default, but I think they would be much better off learning to do so rather than just giving up and going with an inferior option.
Whole life is also not ‘tax free’… its ‘tax deferred’. Which is a good thing, but nowhere near the same as tax free. It’s mathematically the same thing as a non-deductible Traditional IRA… no deduction in the beginning, no tax throughout, and taxes on profits when you withdraw. If you didn’t pay any taxes yet, then the reason is you haven’t withdrawn more than you’ve put in to this point.
I certainly agree that there’s a big difference between companies, and that some (most?) are awful ripoffs, while others actually give you a halfway decent deal. If you really require the security of something like that, at least shop around and avoid the ripoffs.
Daisy says
First I would like to thank for the time and effort in reading my post. I’m seeking for help whether to continue this whole life insurance for our father. My mom passed away with a term life coverage of $50K which helped cover all the funeral costs and some extra. An insurance agent came along and hyped up about whole life and show the millions after 20yrs. Long short, my sister decided to get everyone jointed the whole life on our DAD. After reading the information and got my mind straighten, I think my siblings (8) and I made a very bad choice in buying a whole life insurance for our dad. We recently find out after 4 years into making the monthly payment of $900/mo. for $900K. The whole life that the total cost of the life insurance has gone up to $1300/mo. Our dad was diagnosed with Hep C and high blood pressure last year though. Should we continue? Our dad never really support us in anyway financially. I think if we can contribute that much in a whole life, can we take it elsewhere and invest for better return and not worrying about the rising cost of administrative fee of the whole life? Please help.
fredct says
I have two thoughts on this topic for you…
First, you don’t say the age of your father, but if he’s more than 60 or so (which I get the impression he is), then it’s entirely possible the agent broke the law by selling an entirely inappropriate investment. A high-cost long term commitment like whole-life is completely inappropriate for an elderly person, and there are laws preventing clear abuse. I can’t tell you for sure if this qualifies. I would seriously look into filing a complaint with your state health insurance regulator.
Second, I think it’s very odd that you would commit significant financial resources of your own to cover your dad’s life insurance. So if you can’t afford it, then you should definitely stop.
The problem with stopping life insurance, however, if that you will probably forfeit a significant portion of anything that has built up, so it may not be the best choice by the numbers. So if you can afford the policy, and you’re looking for pure numbers on it, the “Consumer Federation of America” offers an $85 evaluation of any life insurance policy:
http://www.evaluatelifeinsurance.org/
John Butler says
Reading all your comments with great interest. I found myself in my early 50’s, widowed, and realizing I didn’t know what I was doing financially. Fortunately I met someone who was in financial services, and she showed me a complete financial gameplan. Once I saw everything together, what I needed to do became very clear. What I learned: First, we make decisions about money based on emotions. We need to understand all aspects of a fin. gameplan and the purpose behind each part. For example, insurance, debt elimination, emergency funds, retirement accts., college savings accts., and accts. for vacations, and replacing a car.
Once we have these things in place we don’t need life ins. with a “savings”? Learn all the rules that govern these policies. Read, “What’s wrong with your life insurance?” by Norman Dacey. I personally was outraged!
As for, “most people aren’t disciplined enough to invest the difference”. If you can sit down with an agent to set up a whole life insurance plan, why can’t you set up separate accts. for your savings/investment needs and insurance. It comes right out of your checking acct. just like the whole life does, it’s automatic. Lesson #1 in personal/family finances, “Pay yourself first”.
BTW, the rest of the story, I married the woman who showed me the fin. gameplan. She also was a widow, and I retired early from my company and joined her in our fin. services business.
Voicemanb says
I am 69 years old and want to mortgage part of my retirement home. Should I purchase a Term Life policy large enough to cover the entire loan?
Chris Huntley says
Hey Ryan,
Nice summary of term vs whole life. One of the things you recommend is to get dozens of quotes. Do you recommend someone approaches literally dozens or agents or websites, or do you recommend using an independent agent that can show you multiple quotes in one shot? Also, I completely agree with your assessment of whole life. Can be right for investment purposes in some situations, but not usually. Also, thanks for mentioning my calculator in your article! 🙂