What Is the Difference Between Term and Whole Life Insurance?

difference between term and whole life insurance

70 percent of Americans say that life insurance will safeguard their ability to lead a long, financially secure life.

Most Americans buy life insurance to pass along their wealth to their children and grandchildren, provide liquidity for their mortgage payments, cover funeral costs, and so on. If you’ve been thinking about buying life insurance, one of the first questions you need to ask yourself is whether you need to buy term life insurance or whole life insurance.

To make the right decision, you need to understand the difference between term and whole life insurance. In this post, we tell you all you need to know about each of the two types of life insurance and how the two policies differ. This way, you can make an informed choice.

What Is Term Life Insurance?

Also known as pure life insurance, term life insurance is a type of life insurance where the policyholder pays premiums regularly for a set period. Typically, this period is between 10 and 30 years. If the policyholder dies during the specified time, their beneficiary receives a death benefit payout.

If the term expires while the policyholder is still alive, they can opt to renew it for a new term, convert it to permanent coverage, or even allow the policy to terminate.

The most important factor when it comes to term life insurance is the amount of time it’s active. All term policies expire after a specified number of years. This is ideal for someone who expects to build wealth over time and will probably not need the safety net provided by life insurance later in life.

For many Americans, financial obligations reduce after two or three decades. Chances are your mortgage will already be paid off, and your children will be living independently. It’s also likely that you’ll have enough savings to self-insure any remaining dependents.

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Term life insurance allows you to stop paying for coverage you no longer need.

Pros and Cons of Term Life Insurance

One of the biggest reasons people opt for term life insurance is that it’s straightforward, which is perfect for someone looking for a simple policy. The policy is also affordable and does not have any hidden fees, risks, or exclusions. Moreover, the policyholder can choose to cancel the policy before its expiry without losing any value.

The main drawback of this type of insurance is that the policy expires at the end of the term. That means you must shop for a new policy or convert your current policy if you still need life insurance.

What Is Whole Life Insurance?

Whole life insurance refers to a form of permanent life insurance whose effect lasts your whole life. With this type of cover, the policyholder doesn’t need to worry about losing their safety net as they get older.

Generally, whole life insurance is a bit more complex than term life insurance. This is primarily because of the policy’s cash value, which combines both insurance and investing.

Every month, a portion of your life insurance premium goes into your policy’s cash value. The cash value increases over time, and you can use it to take out a loan, pay the insurance policy’s premiums, and so on. When accessing your policy’s cash value, you may need to meet certain terms and conditions or pay additional fees.

Whole life insurance guarantees policyholders cash value. There’s a minimum growth rate for the policy, which is a great feature for building wealth.

People with whole life insurance can increase the value and practicality of their policy through paid-up additions (PUA). These additions are optional, supplemental extras to your plan to make your policy more valuable as a wealth-building tool.

You can choose to add PUAs either at the beginning of your policy or later. Your premiums go up as a result, but you enjoy greater flexibility and higher earning potential of your policy.

If interested in PUAs, inquire from your life insurance provider whether they have PUA Rider. It’s a supplemental feature on your policy that allows you to add money into your insurance policy and start accruing dividends.

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Pros and Cons of Whole Life Insurance

Arguably the biggest benefit of whole life insurance is that it doesn’t expire. That means you don’t need to worry about renewing the policy every ten or so years.

The cash value feature of whole life insurance is also a huge benefit. Besides, this type of insurance is ideal as a forced savings vehicle.

But there are several setbacks of whole life insurance as well. This policy is up to 15 times costlier than term life insurance. Many people purchase less coverage they need or even surrender policies early because of the high costs.

Difference Between Term and Whole Life Insurance

As you’ve seen, term life insurance and whole life insurance differ significantly. For instance, while term insurance is valid for a set period of time, whole life insurance is effective throughout your life.

Term life insurance is also straightforward compared to whole life insurance. With term life insurance, you don’t need to worry about cash value or paid-up additions, which may be complicated to understand for many people. You only need to pay your monthly premiums for the duration of the term.

But perhaps the most important difference between the two life insurance types is the cost. Generally, term life insurance costs a small fraction of what you’d pay for whole life insurance. But the benefits you enjoy with whole life insurance are much more than you would with term life insurance, especially when it comes to building wealth.

Which One Should You Choose?

That depends on many factors, including your financial position and why you want life insurance in the first place.

If you’re working on a budget and expect to self-insure at some point, term life insurance is perfect. If you’re looking to build cash value and have long-term dependents, then opt for whole life insurance.

Understand How to Choose a Life Insurance Policy

Anyone looking for life insurance should first understand the difference between term and whole life insurance. Knowing what each policy offers and how much it costs helps you determine which policy fits your needs and financial scenario.

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