Deciding on life insurance may be the hardest part of adulting. Which type of life insurance makes the most sense: Whole Life or Term Life? What are the pros and cons of each one?
Some experts claim that Term Life is the only right choice, others make a good argument for Whole Life. Only you can decide what’s best for your family.
Whole vs. Term: Which one is right for you?
Deciding on the right time to purchase life insurance is hard, especially if you are paying off debt. Do you decrease your debt payments to make life insurance a priority? Of course, providing for your family is a must. Making sure you can put food on the table and a roof over their heads. But what is beyond that? If you are able to provide the necessities, is there another way to take care of your family?
If you have debt and a family, buying life insurance protects them from the burden you now carry. Not having it can make your debt even more dangerous for your loved ones in the future.
Insurance is the ultimate catch-22. On the one hand, none of us want to spend money every month on something we hope never to need or use. On the other hand, what adult can afford to be without it?
Whether you’re just beginning your career or enjoying your retirement, insurance is a responsibility. It is a gift to those you love should the unthinkable happen. Life insurance will ease the financial burden on your family if they have to carry on without you.
Do I Really Need Life Insurance?
Absolutely. If you are young and single, a small, short-term policy to pay off school loans and cover your final expenses may be all you’re interested in.
If – or when – you have a family, you may need enough insurance coverage to pay off the mortgage, provide for your family, and take care of your children’s future education.
Even in your golden years, you may want to offset the loss of your retirement benefits for your spouse to ensure that he or she doesn’t struggle or become a burden to your grown children.
These are just some of the many emotional and financial reasons to have a good insurance policy. Some circumstances may require only minimal coverage, while others may need a great deal. When it comes to life insurance, you have several different plans and options. The trick comes in deciding what type of policy is right for you and your situation.
What Type of Life Insurance is Right for Me?
Insurance terms and types can get confusing:
- Decreasing
- Guaranteed
- Renewable
- Universal
- Level
- Accidental
… just to name a few! But mainly, you just need to understand that all of these types of insurance fall into two categories: Term Life and Whole Life.
What is Term Life Insurance?
Term Life Insurance is pretty straightforward. For starters, it is the most cost-effective type of insurance. Term has a lower start-up cost than Whole Life and much lower payments. For a reasonably low premium, you can buy a large amount of coverage.
The reason Term Life is more affordable than Whole Life has to do with the fact that a Term policy has no cash value. In other words, your Term Life insurance is absolutely worthless…unless, of course, you need it. Should you pass away during the course of the Term policy, your insurance company will pay the death benefit to your appointed beneficiaries (the people or trust you have selected to receive the payout.)
With Term Life insurance, you pay the scheduled premiums for the length of time you own the policy. In most cases, the payout (death benefit) and the premium (monthly/yearly payments) remain the same during the entire span.
Term can be set up for the amount and length of time you will most need the extra coverage, usually from 5 to 30 years.
- Generally, the younger your family, the higher amount, and longer duration you will probably want.
- Most agents and brokers recommend you purchase a policy that pays 10 to 12 times your annual income. For example, if you make $35,000 a year, you need a life insurance policy that pays out $350,000 to $420,000.
- It is also recommended that in a family situation, both parents are insured, even if only
one isn’t employed full time. - Decreasing term is one term option that often has the most competitive rates. These start with high death benefits which gradually decrease as you become more financially secure and have less need for life insurance (you pay off your mortgage, your children become independent, your spouse’s income grows, you have a large savings account,
etc.) When you become more financially stable, you have less and less of a need for life insurance.
While Term Life is intended to be temporary, once the specific time-frame has lapsed, it can often be converted to Whole Life. This may depend on your age and continuing good health. Other term policies continue to renew annually, but with an increasing premium, until you choose to cancel.
Ideally, no one wants to need the death benefit from their Term insurance. And, fortunately, the chances of your own life outlasting the life of your policy are extremely good. Still, Term Life protects your loved ones while giving you the peace of mind in knowing your family will be well cared for in your absence.
What is Whole Life Insurance?
The primary difference between Term Life and Whole Life insurance is that Whole Life provides coverage that lasts a lifetime. Whereas term eventually comes to an end, whole life carries on with a guaranteed death benefit until the end of your life, even if you live to be 100.
Whole Life has higher premiums than Term. But while Whole Life costs more, it also has more value.
- Whole life provides living benefits well beyond the death benefit.
- Your premium is a financial investment.
- Your policy has a tax-deferred cash value, which grows steadily over time.
The reason Whole Life is more expensive than term is that you are getting a lifetime policy that has a financial savings plan attached. You are building equity into an investment that carries a monetary value, unlike Term Life, that is “all or nothing.”
Once you have sufficient equity built into the account, you will have the option to borrow or withdraw money against the policy (This does, however, reduce your insurance benefit until you repay the loan). Also, should you decide to forfeit your insurance coverage, you can cancel the policy for a cash payout, essentially recouping a percentage of your payments.
Whole Life is definitely more complicated than term because of all the investment and loan options. Some policies also earn dividends. Dividends can be taken annually in cash, reinvested to earn interest or purchase additional insurance, used to repay loans or even utilized to reduce your premium payments. Dividends, while not a guarantee, are an attractive aspect of Whole Life.
Whole life is also an effective way of estate planning. In other words, Whole Life insurance can be added to your will as a way to pass on a legacy to your heirs, a way to care for a relative with long-term special needs, or even as a way to contribute to your favorite charity.
Despite the complexity of Whole Life:
- The premium can be set up to remain the same as long as you are making payments. (There are even some policies that have limited payments. The premium can be paid in full within a specific time frame, though the benefit remains for life.)
- The cash value of your account grows at a secured rate.
- The cash value provides an ongoing asset for your family.
- The death benefit is guaranteed for the course of your life
Is It Hard to Get Life Insurance?
The short answer is “not really,” though life insurance is best purchased face-to-face with a broker or agent rather than over the internet. Understand that a quick purchase is not likely to be the one that will give you the best price or the most benefit. When it comes to life insurance, it is always best to look at the big picture and think about your long-term needs and goals.
Also, if you have medical issues, you may have fewer options than someone in good health.
Quality insurance and lower rates often go hand-in-hand with a required medical exam. This may seem a little intimidating, but it’s a fairly simple screening.
Should something unforeseen happen to you within the first two years having life insurance, your beneficiary will be more likely to collect the death benefit if you chose a policy with a required exam. Otherwise, understand that if you do pass away within the first two years, the only money your beneficiary may receive is a refund of your premium payments.
When is the Best Time to Purchase Life Insurance?
Yesterday! Seriously, if you’re asking the question, the time to do it is now. The younger and healthier you are, the more coverage you can get for less money.
Weigh the pros and cons.
Term Life if you primarily need life insurance to cover debt and care for your young family. Whole life if you are more interested in leaving an inheritance for your loved ones beyond your own savings. Or, you can always get a smaller Whole Life policy and subsidize it with Term Life during the most crucial financial years.
Talk with a life insurance or financial planning agency to help you understand all your choices. This is a no-cost service to you. Working with a professional ensures you understand all of your options and find the policy or policies that best fit your budget and long-term plans.
thank you for this blog. I’ve been waiting for you to write something related to insurance.
Great information! I have a term life policy and had no clue what it mean. Now I do with lot of clarity thanks to this post!
I have a concern about life insurance,
My grandmother mentioned to us how she had purchased 2 on different occasions due to the companies she had them with went bankrupt? Not to sure all the details. But honestly that has been my only concern about purchasing one.
That’s a very legitimate concern. There’s an article you might want to read about what insurance companies are top rated and how they’re rated.
https://www.policygenius.com/life-insurance/best-life-insurance-companies/#the-best-life-insurance-companies
My in-laws purchased and pay for a policy on our son, as a gift. Recently, they decided they couldn’t afford it anymore and wanted us to take it over. First, do people buy life insurance on a baby?its only $6/mo but I see it as an unneeded expense. Second, I noticed on my policy I have for $250,000 it states I would be given $130,000 of it. I’m going to call about this but do you know anything about not getting the whole chunk?
Hello I’m a Retirement Income Certified Professional and can answer your questions.
Buying a juvenile term policy does seem like an unneeded expense but I would purchase a smaller permanent insurance policy to cover at least funeral expenses which are running anywhere from $7k to $10k these days especially if you don’t have enough in your emergency fund to cover it. You don’t want to be in a situation where you have to create a “gofundme” page as I’ve seen too often.
Personally, I wouldn’t go with term though because if you’re paying into something for so long you might as well get a permanent insurance policy that accumulates what they call “cash value.” We have $75k of whole life policies for each one of our kids from Northwestern Mutual which has a strong financial rating. Each one is about $30 and paid-up when they turn 65 but it lasts their entire life. When the child turns 18 (or whatever age after that) you can make the decision to continue paying for it or let them take over as the owner and they can decide if they want to continue making payments and accumulating the cash value, surrender the policy and use the cash for a car, down payment, wedding, etc or continue the policy and use the cash in the form of a loan. Permanent insurance can be a powerful asset in one’s portfolio because unlike investments the assets will never go down because its not tied to the stock market, the money is very liquid (as in you request it today and can get it tomorrow), and its meant for your low-risk dollars (saying this for people who say “buy term and invest the difference”)
Great article, by the way!