Term Life Insurance vs. Whole Life Insurance: Which Should I Choose?
Which life insurance to choose is a highly personal decision based on many factors. Nonetheless, it is impossible to decide which product is best without fully understanding the differences. Here is a guide to both term and whole life insurance, along with the advantages and disadvantages of each. With this knowledge, you will be able to work as a team with your insurance agent to choose the life insurance that is best for you.
What Is Term Life Insurance?
Term life insurance is a relatively new product that began sweeping the insurance industry in the 1980s. The premiums are significantly lower than whole life insurance premiums, there is no extra cash value, and the product is easy to understand.
Term life insurance is purchased for a period of time, such as 10 years, 15 years, 20 years, 25 years, or 30 years, with one insurer currently offering a 35-year term. Your premium is the same each month during the term that you choose. For example, the cost of a 30-year term plan is guaranteed to remain level for 30 years. If you die during the term, your beneficiary receives the full amount of your policy. If you die after the term, and you have not renewed or converted your policy, there is no payout.
Nowadays, there are also term life policies that will pay benefits while you’re still living if you suffer a critical or chronic illness. There are also Return of Premium term policies that will pay you back all of the premiums that you paid into the policy if you’re still living at the end of the term.
Term life insurance is almost always renewable after the initial 10, 15, 20, 25, or 30-year guaranteed level premium period is over. This means that at the end of the term, you can continue to pay for the insurance but at a significantly higher premium.
After the guaranteed level premium period is over, almost all insurance companies allow you to renew only on a one-year basis, which means that your premiums will go up each year. There are a couple of carriers that allow you to renew at the same cost after your initial guaranteed level premium period is over, but the amount of the life insurance starts to decrease each year.
Almost every term life insurance policy is convertible to a permanent type of life insurance, like whole life or universal life, but only until you reach a certain age, which is typically age 65, 70, or 75. Some term life insurance companies allow you to convert to any available permanent life insurance product, while others allow conversions only to a specific, limited choice of products.
What Is Whole Life Insurance?
As the name implies, whole life insurance lasts for your entire life. Your premiums will remain the same throughout your life, and your beneficiary will receive a guaranteed cash benefit when you die.
In addition, traditional whole life insurance builds a tax-deferred cash value over time, and some “participating” whole life companies pay dividends or profits to policyholders. Dividends are a good reason to buy whole life insurance from highly-rated, top-quality insurance companies such as MassMutual, Penn Mutual, New York Life, The Guardian, Northwestern Mutual, or MetLife.
You can borrow against a whole life product, or even cash it out if there comes a time you no longer need or want the insurance. Therefore, whole life insurance can be a valuable financial planning tool.
Some people refer to all “permanent” life insurance policies as whole life insurance, while in reality there are different types of permanent life insurance. In fact, there are more cost-effective alternatives to traditional whole life insurance, such as guaranteed universal life and indexed universal life, for which cash value is not guaranteed. If cash value in your policy does not interest you, then guaranteed universal life may be the best option for you.
Some agents may still refer to guaranteed universal life as term life insurance for life, but it’s evolved into much more than that. Many guaranteed universal life companies allow you to choose the guaranteed level premium/coverage period that you’d like. For example, you could buy a guaranteed policy to age 90, 95, or even 100 at a reduced cost as compared to choosing the “guaranteed for life” product that usually provides coverage to age 121.
There are also a number of guaranteed universal life companies that include living benefits for chronic illness, and some are offering cash refund options on a specific timetable (instead of an overall cash value) if you want to get rid of the policy prior to death.
Advantages and Disadvantages of Each Product
The biggest advantage of term life insurance is the cost. You will almost always pay less for a term life product than for a whole life or permanent policy that would provide lifetime coverage. Even those who fall into a high risk group due to an illness such as heart disease or diabetes will find that term life insurance has lower monthly premiums.
However, term life insurance only guarantees those low premiums for the duration of the term. When it’s time to renew, you will be older and possibly in worse health. Your premiums could significantly increase, even to the point that they become impossible for you to pay.
Whole life or permanent insurance premiums are generally more expensive during the early years, but those premiums will not change as you grow older and less healthy. Therefore, whole life or permanent life insurance is often the smartest choice for those who anticipate future health problems and feel that they may need or want life insurance for their entire lives.
If you’ve maxed out your 401k and/or other tax-deferred investments, then putting money into a whole life policy could make sense as another safe tax-deferred investment. In addition, the cash value of whole life insurance and the living benefits for chronic illness provided by permanent insurance are tremendous assets. These could be used later in life, either as supplemental retirement income or to help pay for potential long term care or home health care.
You can expect to earn a 4% to 5% internal rate of return on the cash value of a good whole life policy. This would be equivalent to about a 5% to 7% return on any taxable investment if you’re in a 28% or higher tax bracket. Many people would be happy to earn a 4% to 5% tax deferred return on a relatively safe investment! No one knows what is around the corner, and the ability to tap into emergency cash or to take a portion of your death benefit while you’re still alive can be invaluable.
Underwriting can also be more liberal on whole life or other types of permanent life insurance as compared to term life underwriting. So if you’ve been “rated” a Table 2 or B to a Table 4 or D rating on term life insurance, it’s possible that you could qualify for a Regular or Standard rate on a whole life or permanent insurance. If you’re over age 55 to 60 and happen to have health issues, it’s possible that a permanent life insurance policy other than whole life could be more cost effective for you than term life insurance.
Which Should I Choose?
Which product to choose is a personal decision. If you feel that you may need or want life insurance for the rest of your life, or if you’d like another tax-deferred place to grow your money, then buying whole life or another type of permanent insurance may be your best option. If you don’t think you’ll need or want life insurance for your whole life, or if cost is an issue, then term life insurance may be best for you.
Furthermore, if you’re unsure, you may want to consider purchasing term life from an insurance company that has great whole life or other permanent products that you could convert to later. Or, you could choose the “best of both worlds,” and buy a portion of term life and a portion of whole life insurance.
For example, a $500,000 whole life insurance policy would be very expensive at any age. A $400,000 term life policy plus a $100,000 whole life policy could be very affordable and is just one of many great combinations of coverage that might work for you.
Whatever product or products you ultimately decide are best for you, make sure to work with an agent that can offer you a lot of different insurance companies and products. There is no right or wrong thing to do when it comes to purchasing life insurance, and whatever type you choose does not have to be the “perfect” solution. You can always make changes later. Just remember that having any life insurance is better than having none if you have people who rely on your income.
Family owned and operated since 1969, American Term is dedicated to getting you the right life insurance at the right price, even if you are considered high risk. If you have been quoted a high price or even told that you are uninsurable, we can help! Call us today at 1-800-380-3533 or click here to email to learn how our unique dual application process can bring your life insurance premiums down. We look forward to working with you.
Since 1992, Gordon E. Conwell, III (G3) has helped thousands of ”higher risk” individuals get the best life insurance rate/value. Being a high risk himself, he knows the struggles you’ll face trying to get affordable life insurance. His unique shopping process and underwriting knowledge will result in the best offers, every time!