Most people are torn between choosing term life insurance or whole life insurance. So, we at Insured Goals decided to have this article that will break down all its differences. Whole Life vs Term Life Insurance, which one will suit your needs.
We already know that life insurance is a powerful product, especially if we want to secure the future of our beloved family. But there’s still a lot of people who don’t know which one they should buy. To help you have clear insights, let’s start tackling the Whole Life vs Term life insurance.
Whole Life vs Term Life: First things first, what is term life insurance?
Term life insurance provides coverage typically for a set period of time and most people go with 20 to 30 years. If you passed away during the said period of time, then your beneficiary will then receive a benefit. If the policy for example has a $500,000 payout, you pass away within 20 to 30 years. Your beneficiaries, usually your spouse or your child will get this payout.
The nice thing about term life insurance is that it’s very affordable or less expensive.
Term life insurance has no cash value, you’re not investing any money in this type of insurance. Let’s use $500,000 again as an example, you pay a certain amount per month, let’s say you pay $20-$30 per month and you get this $500,000 of coverage, and that’s it you’re not building anything, you’re not investing that money, you’re not making any interest on that money.
Term life insurance is not worth anything until you actually need it. But that’s actually the whole point of “insurance” so it’s not necessarily a bad thing.
The Pros That Come With Term Life Insurance
- Income Replacement
Term life insurance is a great choice for people who are looking to replace their income. So, for example you have a family of 4 and you’re making 5 million dollars a year, you need to have something that will cover about 10 to 12 times your annual salary. So, when death comes your spouse or your beneficiaries will take that lump-sum and invest it in the stock market. Hopefully live off the interest that would have been paid to you as your salary.
- Inexpensive
Premiums are much lower and much affordable than whole life insurance. Having said that you can actually use this to put down and pay off your debts and get out of it.
- Business Policies
Term life insurance is also a great option for business. If a business has a key person within an organization and they pass away, the organization or whoever their beneficiary will receive that insurance policy or its benefit.
Cons of Term Life Insurance
Term life insurance is costly to renew. Once the term insurance policy expires, you have to apply again for a new one. When that point comes, for example, you are already 60 years old when that time comes. You are more prone to health risks, less energy and less time to live. That’s the reason why it’s costly in terms of policy renewal.
This is only a summary of term life insurance, to learn more about it, you can check our analysis on term life insurance.
What is whole life insurance?
Whole life insurance consists of 3 components. The premiums wherein the policyholder pays monthly. Both Whole life and term life insurance have premiums, the only difference is that the whole life insurance has a higher premium than term life insurance. There’s a reason why it’s higher though. Second component is the death benefit, the amount you’re paid upon your death. Lastly, the cash value, this is the one that differentiates the whole life vs term life. The cash value is like an investment or savings component.
This is how whole life insurance works. When you pay your premiums, some part of it goes directly to fund the death benefit. While the other parts are going to build a cash value. You should also take note that the majority of your premiums are going to the commission of the insurer or the salesman. That’s one of the reasons why they always push the idea of whole life vs term. Some parts of the premiums are also going to the administrative fees.
Pros of Whole Life Insurance
- Lifetime Coverage
The lifetime coverage policy covers you until the day you pass away. Premiums are also guaranteed.
- A Tax Free Cash Value
The cash value is non-taxable, you can also borrow against that cash value if you want or need to. In addition, the good thing about non-taxable cash value is that the money grows faster.
Cons of Whole Life Insurance
- Very Expensive
- Rigid or Nonflexible
- Cash values are slow in the first 5-10 years
- Cash values are not going to your beneficiaries
Note that this is only a summary of whole life insurance, to know more about this topic, you can check our simple analysis on whole life insurance.
Whole Life vs Term Life Insurance Which is better?
Well, it depends. First, if you are looking for a budget friendly and term life insurance is the only thing you can afford. Then it’s a better option, since basic protection is better than no protection at all.
But if you can afford higher premiums, then maybe whole life insurance is for you. Since this type of insurance can help manage some financial needs more effectively. Parents may also want to consider whole life insurance, since it lasts your lifetime. As long as you don’t skip paying your premiums, your kid will receive the death benefit from your policy.
Whole life insurance actually has more financial flexibility because of its cash value component than term life insurance. But permanent policies are more complex and not affordable. A lot of consumers are preferring term life insurance and most of them are following an old axiom “buy term and invest the rest”.