Term vs. whole life insurance: How to choose what’s right for you

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Term life insurance covers you for a specified amount of time, whereas a whole life insurance plan covers you permanently. Whole life insurance provides more coverage and a cash value that you can borrow against, but it’s significantly more expensive.

For many, talking about life insurance with loved ones can be scary as it makes us confront difficult topics around death and finances. The reality is that life expectancy in recent years has declined due to the COVID-19 pandemic and other factors. Additionally, there are between 180,000 to 450,000 sudden unexpected deaths (SUDs) each year. We don’t share this information to scare you, but rather explain why it’s important to think about how you plan to protect your loved ones in the event of an unexpected death.

This can often be a difficult topic to discuss, but it’s why life insurance is such an important resource.

Like other forms of insurance, life insurance provides a sum of money should an individual pass away. With life insurance, you name beneficiaries like your spouse, children, or others, so they’re financially secure if something were to happen to you.

Here, you’ll learn the differences between term life vs. whole life insurance, the benefits and drawbacks of each and how to choose the one that’s right for you and your family.

Key takeaways:

Term life insurance is similar to regular insurance because you’re covered for as long as you have the policy
Whole life insurance is more expensive than term life, but it covers you permanently
The average price of whole life insurance can be five to 10 times more expensive or more, but it also provides more coverage and benefits

What is the difference between term vs. whole life insurance?

The primary difference between term and whole life insurance is that term life insurance lasts for a certain number of years and whole life insurance lasts as long as you’re alive. While paying your premiums for whole life insurance, you also have an account with a tax-free cash value, which you can borrow against.

What is term life insurance?

Term life insurance covers you for a specified amount of time, which is typically between five and 30 years. If an individual passes away during the term, the beneficiaries of the policy receive a payout. Between term and whole life insurance, term life insurance is often the more affordable option.

When signing up for a term life insurance policy, you can choose one that’s unique to your situation. By doing this, you can sometimes find a lower price to reduce your premiums.

The pros and cons of term life insurance

Term life insurance’s biggest benefit over whole life insurance is the cost. It’s more affordable, but there are some downsides to consider as well.

Pros:

Affordable
Policies are easier to understand
Better for young, healthy people

Cons:

Beneficiaries don’t receive money if you outlive the term
No tax benefits
No cash value

Term life insurance is similar to other insurance policies in the sense that if nothing happens, you don’t receive a payout or other benefits.

What is whole life insurance?

Whole life insurance covers you for as long as you’re alive, but it’s often more expensive than term life insurance. Those who choose this option need to budget for insurance a bit more to get the additional benefits. Also known as “permanent life insurance,” this insurance policy never expires as long as you’re paying your premiums on time.

The pros and cons of whole life insurance

The biggest benefit of whole life insurance is that your loved ones will receive a payout regardless of when you pass away. It also has some cash and tax benefits, but there are some drawbacks to take into consideration, too.

Pros:

Lasts as long as you’re alive
Can borrow or withdraw money from the policy
Loans are usually tax-free
Premium price doesn’t fluctuate

Cons:

More expensive than term life insurance
Policy may be canceled if you miss a payment
Unpaid loans reduce the benefits

When you make payments on whole life insurance, the payments are split between your premium and the cash value. According to Fidelity Life, the amount going into the cash value is larger at the start of the policy and gradually lowers over time. This cash value can also accrue interest, which makes it similar to a savings account.

What’s the cost difference between term and whole life insurance?

As mentioned, whole life insurance can be much more expensive than term life insurance. To simplify, we’ll use a $500,000 policy to look at the average cost difference between the two. This can help you whether you’re budgeting for retirement or looking to get a policy while you’re younger.

The following monthly rate averages come from research conducted by Quotacy for term life insurance and Policy Genius for whole life insurance:

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Person covered	20-year term for a healthy, nonsmoker	Whole life
25-year-old male	$18.42	$393
25-year-old female	$14.86	$346
35-year-old male	20.22	$571
35-year-old female	$17.27	$481
45-year-old male	$$42.50	$866
45-year-old female	$35.99	$716
55-year-old male	$112.61	$1,380
55-year-old female	$82.77	$1,173

This is just to give you an idea of the averages based on the two studies. There are other policies that may be cheaper or more expensive, depending on the policy. For example, both term and whole life insurance can have $250,000 and $1,000,000 policies, which can affect the pricing.

How to choose between term and whole life insurance

So, which is better when it comes to term life vs. whole life insurance? Like many financial decisions, it depends on your personal situation as well as your family’s wants and needs.

Here, we take a look at both forms of life insurance and offer some suggestions that may help you make your decision.

You may want to go with term life insurance if you:

Want insurance for a specific period of time
Are on a budget
May want to switch to permanent coverage later on
Are not interested in using life insurance as an investment

Whole life insurance may be a better option if you:

Want a policy that comes with more benefits
Can afford the higher premiums
Are interested in guaranteeing that money is left for your loved ones
Want your insurance policy to build a cash value

At the end of the day, having a life insurance policy is better than not having one. Regardless of your situation, it’s advantageous to ramp up your saving and budgeting to ensure you can get either term or whole life insurance.

FAQ

You may still have some questions about term vs. whole life insurance. So, we’ve answered some of the most frequently asked questions below.

Is term or whole life insurance better?

This depends on your situation. If you can afford a whole life insurance policy, it’s typically the better option because it provides a cash value and doesn’t expire. If you’re on a budget, you may want to choose term life insurance.

What happens to term life insurance policies at the end of the term?

If the term expires, your coverage ends, and you typically don’t have to do anything. You may be able to convert the policy into a whole life policy as well, depending on your insurer’s guidelines.

Can you cash out a term life insurance policy?

No. Term life insurance policies do not have a cash value like whole life policies.

Do you get your money back at the end of a term life insurance policy?

No. Similar to car or medical insurance, you don’t get money back if you outlive your policy.

Why life insurance matters for your financial planning

Life insurance provides a sense of security and peace of mind to you as well as your family should the unfortunate happen. Now that you know the pros and cons of the primary types of life insurance as well as the costs, the next step is to ensure life insurance fits within your budget.

Another consideration is that your credit score can sometimes affect the cost of your insurance policy. If you’re unsure of where you stand with your credit score, getting a free credit report card can help you. Also, be sure to check out our ExtraCredit to learn more about how five features can help you see where you stand, so you can work toward your credit goals.

The post Term vs. whole life insurance: How to choose what’s right for you appeared first on Credit.com.

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