Before you make that choice, make sure you know what’s what. The reality is that both term and whole life insurance have their virtues. It’s just a matter of which will work best for you.
Here’s what you need to know and ask when trying to decide which to choose.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance, which comes in three types: whole, variable and universal. They became popular after the financial crisis in 2008 and 2009 to help provide more financial protection.
- Whole life insurance incorporates a cash value element (which contributes to the higher cost) that you don’t get with term life insurance. What this means is that as you pay insurance premiums, some of what you pay is available to borrow against or cash out during your lifetime.
- When you buy whole life insurance, your insurer calculates your premium (minus insurance costs and other expenses) into a cash-value account.
- For that reason, whole life insurance can provide the accumulation of cash value (tax-deferred), and you can use it when you need it.
- You can withdraw most or all of what is accumulated into it tax-free, as long as you stay within government guidelines when paying premiums.
- Whole life insurance offers level premiums and life insurance protection for life – as long as the premiums are paid as your insurance requires.
Whole life insurance tends to be more expensive than term life insurance and sometimes people underestimate how much the payments will be, so they check out and they switch to term life insurance.
For term life insurance, Policygenius – an independent insurance broker that is not affiliated with any insurance company – offers a wide variety of plans and after running it all through its algorithms, provides you with your best options. This will save you a ton of time requesting quotes and trying to compare the quotes and what is being offered.
Plus, if you don’t want to take a medical exam to get insurance, Policygenius is a perfect choice. They’ve paired up with Brighthouse SimplySelect℠ to offer policies (up to to $2 million in coverage) that don’t require an exam, and all you’ll need to do is answer an over-the-phone questionnaire with a Policygenius agent.
And according to Policygenius, the fact that you don’t need to take a medical exam, won’t raise your premiums in this instance either (it typically does with other companies).
What is term life insurance?
Term life insurance is simpler and the concept is more like your car or app德扑圈官方网址home insurance.
The main difference between term life insurance and whole life insurance: with term and permanent life insurance, when the insured person dies, it just pays the face amount of the policy to the named beneficiary.
- With term life insurance, you pay premiums either every month or every year, and your family is protected for that term – for example, 20 years.
- Term life insurance can be bought for periods of one to 30 years.
- Term life policies tend to be fairly cheap for healthy people under 50, then get progressively more expensive.
According to State Farm, common uses for term life insurance are: helping provide for a family’s loss of income, covering short-term debts and needs, providing additional insurance protection during the child-raising years, providing longer-term protection to help pay off a mortgage or to help pay for a college education.
For term life insurance only, Bestow offers you the option of buying 10, or 20-year term life insurance policies and you can do it completely online without even getting a medical exam to process your application.
Coverage is up to $500,000 for two-year terms and up to 1 million dollars for 10 and 20-year terms. Bestow is available across the United States in all states except New York.
Variations on term life insurance
- You may hear about returns of premium term life insurance which returns some of your premiums at the end of the term. Note that these policies are generally more expensive.
How much life insurance do you need?
This is the question of the hour, right?
Life insurance amounts for a single person
A single person who has no dependents probably only needs a small life insurance policy. $50,000 or even $25,000 may be enough. Since there is no one else who will rely on the income, it’s basically a matter of having enough insurance to pay for final expenses and any lingering obligations.
Given that the amount of coverage is relatively small, a single person may be well served by going with a whole life policy. The benefit here is you get a permanent policy, with a fixed annual premium. And these are two things that term life insurance doesn’t offer.
Life insurance amounts for a family
At the opposite end of the spectrum is a young family. If you have very young children, your need for life insurance is probably greater right now than it will be at any other time in your life.
Were you to suddenly die, there would have to be sufficient funds available, not only to cover final expenses but also to provide sufficient support for your children until they reach adulthood. In addition, you will want to make some sort of provision to pay for their college education.
In this situation, a $500,000 life insurance policy might be the absolute minimum. For example, it would provide $20,000 for final expenses, $300,000 to provide $20,000 a year for support for the next 15 years, and the remaining $180,000 to be used for their education.
Naturally, it will be much more expensive to have a larger amount of life insurance coverage. In that situation, the young family would likely favor term life insurance.
How long do you need coverage?
Covering final expenses (death) is a permanent insurance need. If final expenses are all that you need, a small whole life policy will get the job done.
Raising a family, on the other, creates a large temporary need. You may need a large amount of coverage for 20 or 25 years. And after that, final expenses may be all that needs to be covered.
If the need for life insurance is temporary, term life is usually the better option. You can take a policy that has a term running from five to 30 years, which can be used to cover the higher need. After the initial term expires, you’ll have the option to either:
- Continue coverage at a higher premium,
- Lower the death benefit and therefore the premium, or
- Cancel the policy completely
How much life insurance can you afford?
This is always the underlying question when it comes to life insurance.
Obviously, you cannot have more life insurance than you can afford. And this is typically a problem for the people who need the most life insurance coverage, which is people with dependent children. Unfortunately, the cost of raising children consumes a lot of income. That can leave little left over for a contingent benefit, like life insurance.
In most situations, where affordability is a major factor, term life insurance is the preferred policy. That’s because you can typically buy the most coverage for the lowest premium.
Is a specific need temporary or permanent?
There are many reasons, other than having a family, that would require additional life insurance, either on a temporary or permanent basis.
- For example, you might want to have additional insurance coverage while you owe a mortgage on your house. The policy will pay off your mortgage in the event of your death, enabling your spouse or your family to continue living in the app德扑圈官方网址home mortgage-free.
- You might also want to have additional coverage for other types of debts. One prominent example is debt you owe jointly with your spouse, such as credit cards or car loans.
- You may have business-related debt. If you took on debt to start a business or to either expand a business or sustain it during a rough patch, you might want to have additional life insurance that will pay off those debts.
Term life insurance tends to be the more cost-effective solution since you can match the term of the policy with the length of time it will take you to pay off your debt.
On the permanent side, if you set up a trust for your spouse or children, you may want to fund it with whole life insurance; that’s a very common practice. A term policy would not be appropriate for this purpose since the policy will either terminate or renewals will become expensive as you move into old age.
Do you want a cash value option?
Both term and whole life insurance provide a death benefit. But only one – whole life – also provides a cash value option.
The cash value is the main reason why whole life can be so much more expensive than term life; some of the difference in price between the two goes into the cash value of the policy.
The cash value represents an account value that you can borrow against, or liquidate by canceling the policy.
That means that a whole life insurance policy, besides providing a death benefit, will also provide potential for cash value build up. And that benefit can be substantial after 20 or 30 years, even to the point of representing an additional retirement resource.
What should I choose: whole life or term life insurance?
It is often said that the best strategy is to buy term life insurance and invest the difference.
Let’s break down what that means:
This refers to buying an inexpensive term life insurance policy, and then investing the savings (versus a whole life policy premium) in an index fund. You will generally have more money at the end of many years using that strategy.
A large family may want to check into term insurance, and a single person – with no dependents – might benefit from whole life insurance. However, this can vary depending on a range of factors.
For most young people, we suggest basic term life insurance. It’s straightforward and inexpensive, and could leave you more money left over to invest for retirement and other goals.
One of the best ways to save money on term life insurance is to choose the right insurer. Policygenius makes that easy, gathering quotes from a variety of insurers to help you get the best rate. Bestow provides policies with a single insurer, but it uses big data to make the application process easy, letting you skip the medical exam requirement. Another affordable insurer to consider for term life is Fabric, which specializes in providing insurance policies to parents.
In some cases, if you’re looking for insurance that provides tax benefits and a guaranteed return on the money you’ve paid in, you might consider a whole life insurance policy. We recommend, however, that you only buy life insurance after consulting an independent financial planner or estate planning attorney.
And finally, if you don’t have an orientation toward saving money, you might want to look into a permanent life policy so you don’t just blow through the savings intended for your investment.
Term vs. whole life: features comparison
As you’re deciding which policy is right for you, consider the following differences in features:
- Benefits: With term life, your survivors get death benefits only. Whole life pays out death benefits plus the cash value of the policy.
- Borrowing funds: You can borrow against the funds in your whole life policy. Term life policies don’t accrue cash value, so it will only pay out in cash if you die. Both whole and term life policies provide a tax-free death benefit, but with whole life, you can take out tax-free loans on the money.
- Payout terms: Benefits are paid only if you die while the policy is in place with term life. If the policy expires before your death, you’ll forfeit the money in it. Whole life covers you for the entirety of your life, never expiring.
- Conversion: Term life can be converted to whole life, typically between a certain age or within a certain timeframe. If you want to cancel your whole life policy, you’ll have to cash out the funds.
- Policy value: The value of the death benefit of term life insurance is usually lower than whole life since you’re only getting a death benefit from the policy. Term life is generally issued in increments of $50,000 and can go all the way up to $10 million.
Term vs. whole life: cost comparison
As you’re weighing the features of each type of plan, it’s important to also take a look at the cost difference between the two. Due to its higher value over time, the length of coverage, and the fact that you can take loans on the amount, whole life is significantly more expensive. You can find your quoted premium prices as high as ten times what you’re quoted for term life.
When you’re considering buying life insurance, I recommend that you avoid the ‘which is better debate’ entirely. Instead, focus on your own needs, circumstances, and financial habits. This is what will really help you determine which is the right type of policy for you.
Want to get started? Money Under 30 has partnered with Policygenius, an online service that makes it easy to get a quote for term life insurance. Click the link below to get your quote started, and click here to get our full review of their service.