When you’re looking for a great life insurance policy, two of the most common types you’ll find are term and whole life. Both policy types can have significant advantages over the other depending on what stage in life you’re in and what’s most important to you and your family.
The differences between term life vs whole life insurance can be a little bit like renting vs buying a home. Even though both give you coverage (i.e., a roof over your head), each option can have its own unique pros and cons.
For instance, renting a home is often more affordable than owning one, but it’s also only a temporary solution. Between the mortgage, property taxes, and insurance, owning a home tends to cost much more – however it’s a permanent option that also allows you to build equity in your property.
The same types of qualities are true for term vs whole life insurance. In this post, we’ll compare term life insurance vs whole life and explain everything you need to know when deciding between term and whole life insurance.
Term vs Whole Life Insurance Pros and Cons
There are pros and cons to both term life and whole life insurance; though what’s a pro or con for you may differ from what we’ve laid out below depending on your personal circumstances.
Term Life Insurance Pros and Cons
Term Life Pros
- Initially less expensive. Applicants who are young and in good health can expect to pay less for a higher death benefit.
- Simplicity. A term life policy is very straightforward. Applicants who only want a defined death benefit for a certain period of time can buy exactly what they need.
- Flexible terms. Policies can be purchased in 5-year increments from 10 to 30-year terms. Other variations and insurance riders are also available.
Term Life Cons
- Coverage is only temporary. Once a term policy expires, you’ll no longer be covered. You will need to reapply to renew or buy a new policy. (Note: There are renewable term life policies, but they are not the norm.)
- Cost increases with age. Whether you renew or purchase a new term life policy at the end of your term, the cost will be higher because you’re older (re: higher risk).
- New health issues. If you experienced any negative changes in health over the term of your original policy, you may be denied when you apply for a new term life policy.
Whole Life Insurance Pros and Cons
Whole Life Pros
- Coverage is permanent. Once an applicant is approved, they will have whole life coverage for the rest of their natural lives.
- Premiums are consistent. Premium payments are fixed over the life of the loan.
- Policies include a cash value component. A portion of every dollar spent on the premium goes into a separate tax-sheltered savings account that accumulates interest.
- The cash value can be borrowed against. Owners can use the cash value of their policy as collateral for a loan.
Whole Life Cons
- Policies are expensive. Because coverage lasts the owner’s lifetime and builds cash value, the premiums are higher than other types of life insurance.
- Cash value grows slowly. A whole life policy’s cash value earns a relatively small fixed interest rate. The policy’s cash value doesn’t have as much growth potential as with other types of permanent policies (such as variable universal or indexed universal).
- Limited flexibility. Unlike term life insurance, there isn’t as much flexibility for applicants to customize the details of their whole life policy.
Term vs Whole Life Insurance: Which one is better?
Since these two types of life insurance seem like polar opposites, what makes one better than the other? The answer depends on what stage of life you’re in, what your future needs will be, and how much your budget permits.
When Term Life Makes Sense
One of the most common scenarios where term life is appropriate is for young adults who just got married and are starting a family. Often, these families have many competing financial priorities and money is tight as they’re relatively fresh into their careers and taking on new financial responsibilities. For this reason, young people are drawn to term life insurance because of its low premiums. When you’re young and in great health, you can buy an affordable 30-year policy that will provide coverage right up to when you might be planning to retire.
Middle-aged and older adults can also benefit from a term life policy. For example, someone who is already covered by a group life insurance policy through work can buy supplemental term life or someone with a mortgage can purchase mortgage protection insurance.
When Whole Life Makes Sense
Whole life insurance is a great option for people of all ages who want two things out of an insurance policy, both now and in the future:
- Lifelong coverage
- The opportunity to build cash value within their policy
Similar to term, one of the best times for a person to apply is when they are young and in good health. Even though whole life premiums are higher than term, purchasing a policy early in life helps ensure that they get the best rates. It also maximizes the amount of time that the policy’s cash value will have to grow.
Some people perceive the opportunity to use this cash value later in life as more valuable than the death benefit itself. With whole life, policy owners can borrow against their cash value to:
- Start a business
- Perform a home renovation
- Pay for higher education or a wedding
The cash value can even be used to pay the policy’s premiums, making a whole life insurance policy self-sustainable over time.
It’s not always straightforward or easy deciding between term life vs whole life insurance. If you have questions or want to discuss your options with an independent life insurance broker, the insurance advisors at TDK are more than happy to help. We sincerely believe that there’s a plan for every budget and every condition – call us today and we’ll get you covered.
