What’s the Difference in Whole Life vs. Term Insurance

by: Remie Longbrake | published: Oct. 5, 2020

Of course, no one likes to think about it, but at some point we’re all going to leave this Earth. Just as taxes are inevitable, so is death. While that may not be the best or most desirable thing to think about, the beauty is that you can and should prepare and with insurance solutions in place to help you can protect your assets and your family for when that time comes. 

In general, there are two primary types of life insurance:

• Whole life insurance
• Term life insurance

There are pros and cons of both types, so it’s critical to carefully compare the two to ensure yourself of making an informed decision.

While the cost of whole life insurance vs term is sure to come into play – and it’s something we’re going to discuss in great detail – let’s first start with a basic overview of each type. 

What is the difference between whole and term life insurance?

The biggest difference between whole and term life insurance is that term life insurance does not include an investment component like whole life insurance policies do.  The other main point of difference is that whole life insurance was designed to cover policyholders for their entire life, or up to age 100, whereas term life insurance only covers you for a certain period of time and then expires if not renewed, even if the insured person is still living.

Top Features of Whole Life Insurance

With whole life insurance, you’re buying a policy with a guaranteed death benefit. As long as you continue to pay your premium, your beneficiary will receive the predetermined benefit at the time of your passing.

Some of the top features associated with a whole life insurance policy include:

• Lifetime coverage: The policyholder would typically be covered for their entire life, as long as they continued to pay their premiums when they were due. 
• Guaranteed death benefit: A lump sum guaranteed to be paid to the policyholder’s beneficiaries upon the policyholder’s death. 
• Cash value: A portion of each premium would be put into a savings account and invested by the insurer in order to earn interest for the policyholder. These guaranteed earnings were referred to as ‘cash value’ or ‘surrender value’.
• Level premiums: Premiums would stay the same throughout the life of the policy with no increase in line with age or health factors.
• Dividends: Certain policies would allow the policyholder to receive dividends on their cash value. Dividends could be withdrawn, used to increase the cash value or to reduce premiums.

With features like these, it’s easy to see why whole life insurance is a popular choice for many families. 

Top Features of Term Life Insurance

Term life insurance is unique in the way that you purchase coverage for a predetermined period of time, such as 10, 15, or 20 years. Once this period comes to an end, you no longer have coverage. At that point, you’re once again in the market for a policy.

Top features of term life insurance include:

• Death benefit: A lump sum paid to your beneficiaries if you die within the life insurance term. This benefit generally increases each year to keep up with inflation. 
• Level, stepped or hybrid premiums: Depending on your age, term life insurance policies generally allow you to choose between level, stepped or hybrid premiums. In comparison to level premiums which remain constant, stepped premiums increase as you get older to reflect your higher risk of death. Hybrid premiums are a mixture of level and stepped premiums. 
• Flexible coverage: Typically, you can apply to increase or decrease the amount of your cover at any time. Usually your applications would be subject to the same eligibility criteria that your insurer used to assess your eligibility for the product initially and you may not be required to undergo additional medical tests. However, additional premium costs will often apply if you decide to increase your cover.
• Convertibility: The ability to convert it to whole life insurance in the future.
• Lower costs: There’s a lower cost to term since has a shorter term date and no investment component.
• Riders: These are policy add-ons that typically will increase your premium, but offer additional ways to tailor the coverage to your needs.

As you can see, term life insurance has a much different set of features when compared to whole life insurance.

Factors that Determine Your Cost

In a perfect world, you’d qualify for a high level of life insurance coverage at an affordable monthly premium. While it may work out for you, life insurance companies take many factors into consideration when calculating your premium. This includes but is not necessarily limited to:

• Your current health
• Your current age
• If you’re a smoker
• Preexisting conditions, such as cancer, heart attack, or diabetes

For instance, a 30-year-old in perfect health will pay less for the same life insurance than a 60-year-old with a history of cancer or other serious health risk.

Questions to ask if term or whole life insurance is best

This question is dependent on your financial situation but, when deciding between term and whole life insurance, you should consider the following questions:

• How long do you need coverage?
• What are the reasons for getting insurance?
• Do you just want a death benefit or an additional savings platform?
• What is your net worth?
• How much can you afford?

Final Thoughts

As you compare the cost of whole life insurance vs term, do so with the idea that you can only afford what fits your budget.

It’s important to purchase a high quality and comprehensive policy, but make sure you’re comfortable with your ability to make the premium payment every month, quarter, or year and will not let coverage lapse.

Purchasing life insurance is a personal decision. Don’t allow sales materials to convince you that one item is better over another, but look at what the needs of you and your family are;  whether it be long-term retirement attributes or life insurance. In the case of life insurance, there are other ways to provide the same benefits you’d receive from a permanent policy, whether that be from purchasing term coverage or simply self-insuring if that’s a feasible option.

Choosing life insurance can pose a significant challenge. While all life insurance provides funds in the event of the insured’s death, the same factors, the purpose for which the funds are intended, the cost, and the needs of the beneficiary should be considered when selecting the type of life insurance most appropriate to your situation.

We hope these steps will help you make an informed and confident decision. Please seek a qualified retirement or insurance professional before purchasing to fully understand the risks and benefits to your specific needs.