Policy Types

Term vs. Whole Life Insurance: Which Is Right for You?

Term life insurance and whole life insurance are two of the most familiar types of policies. Both feature a number of benefits, but it can be confusing to figure out which one is right for you.

Comparing term life vs. whole life insurance

What's the difference between term life insurance and whole life insurance? In this article, you'll learn the features of each policy type and other considerations so that you may be better prepared to make an informed choice based on your unique needs.

Below, find benefits and features of both types of policies, starting with term life.

What is term life insurance?

Term life insurance can be one way to balance affordability with future financial security. Under current tax laws, it provides a tax-free death benefit to your beneficiaries. Your family could use funds for funeral expenses, income replacement, children's education and debt payoff in the event of your passing.

With term life insurance, you select a policy length, typically 10 to 30 years. This can be effective if you want financial protection during a certain period of your life, such as while your children are young and financially dependent on the household income.

Your premiums stay the same throughout the term, allowing for easier budgeting. Term policies are usually less expensive than whole life policies, but typically they don't build cash value over time. You may have the option to renew your coverage once the term has ended, but that typically will trigger a significant premium increase. At that point, you may have the option to convert it into a whole life policy, depending on the type of term life policy you have.

What is whole life insurance?

Whole life insurance is permanent, meaning you're covered for your lifetime, as long as you make the required payments on time. It provides a death benefit along with cash value. Depending on the policy terms, you may be able to access your cash value through loans for future needs or allow it to grow tax-advantaged at a fixed interest rate over time. It's important to note that loans accrue interest and can reduce the death benefit if they remain outstanding at the time of the insured's death. Whole life insurance rates are more expensive than term life policies. The cash value can grow over the long term. This can make whole life policies an appealing option for estate planning.

If you surrender your whole life policy you may be entitled to a portion of the cash value. However, this "surrender value" will take into consideration any outstanding loans, premium payments, or surrender charges. Your premiums stay level, and are not adjustable if your financial needs changes during your lifetime.

What's the difference between term vs. whole life insurance?

This charts shows a general side-by-side comparison of the policy differences:

Features Term Life Insurance Whole Life Insurance
Duration One to 30 years Lifelong coverage assuming required payments are made on time.
Income tax-free death
benefit
Yes Yes
Cash value No Yes-accessible through policy loans or surrenders
Premiums Lower but subject to increase at renewal Higher but remain the same regardless of age

Why is whole life insurance more expensive?

As you're evaluating the expenses of whole life vs term life, you'll notice rates for whole life insurance are higher. It's because whole life policies are designed to last longer (your entire lifetime, instead of a specified term) and carry more administrative costs.

Term life insurance is generally less expensive because it lasts for a limited time period and has no cash value.

Comparing the cost of term vs. whole life insurance

It is difficult to do an objective comparison of term and whole life policies. While they are both designed to pay a death benefit to your beneficiary(ies), they function very differently in some ways. In general, you will pay more for a whole life insurance policy than you will for a term policy, but the choice needs to be based on what benefits/features are most important to you.

If cost is the primary factor for your decision, a term policy is likely to win over a whole life policy. If there is a need to extend coverage at the end of a term policy - then a whole life policy may be a greater value to you. It is important to evaluate the features and functions of different types of policies and determine which best meets your needs.

Choosing the right life insurance policy for you

There are a handful of factors to consider when choosing between term or whole life insurance, including:

  • Your age
  • The age of your children and spouse
  • Your family's financial needs (child care, tuition, student loans, etc.)
  • Health expenses
  • Mortgage and other debts
  • Your retirement assets

A knowledgeable insurance agent can help you pick a policy that suits your goals and circumstances. But generally speaking, term life insurance may be appropriate if:

  • You have a temporary need for life insurance.
  • You need a large amount of coverage for a few years or decades where your need outpaces income.
  • You want to cover your family's financial obligations if you pass away early.

You may want to consider whole life insurance if:

  • You have a permanent need for life insurance.
  • You are purchasing within a trust for your family or estate planning.
  • You have a health concern that would make it harder to get coverage later in life.

When you're shopping for life insurance, it's important to weigh multiple factors and focus on your personal needs and circumstances. Term life insurance and whole life insurance both have pros and cons. Now that you understand the differences, you can make an informed choice that's right for you.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

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