Life insurance is a type of insurance which allows policyholders to leave a cash lump sum to their descendants when they die. According to the Insurance Information Institute, about 60% of adults in the United States hold an active life insurance policy. There are two major types of life insurance, term and whole life insurance. The primary difference between the two is the former is time-limited, whereas the other is not.
Both life insurance options have their pros and cons. Everyone should consider and evaluate their own needs before deciding on the best policy type for them. First, it is important to know about the advantages and disadvantages of both policy types.
What is Whole Life Insurance?
Whole life insurance, often referred to as permanent insurance, is a life insurance policy offering coverage for the policyholder’s lifetime. There are no catches, so even if the policyholder lives to be a hundred, the policy will continue to remain active as long as the premiums are paid.
The insurance policy constantly accumulates cash value. Some insurers may also offer additional benefits, such as a policy loan.
Whole Life Insurance Pros
Whole life insurance builds up a constant cash value over time. This can be useful to help pay inheritance or estate taxes. It can also be useful if the policyholder has a lifelong dependent, such as a disabled child.
It is also possible to take out a loan against the insurance policy. Any unpaid loans will be deducted from the cash lump sum after the policyholder’s death.
The majority of whole life policies also have a fixed premium. Regardless of what is going on in the wider economy, the policyholder will never see their premiums change no matter how long they live.
Fixed premiums make it easier to plan financially and provide peace of mind.
Cons of Whole Life Insurance
Unfortunately, with the advantage of fixed premiums comes an element of risk for the insurer. They compensate for this risk by charging higher overall premiums. These higher premiums are designed to factor in inflation and future changes in the economy.
According to Investopedia, whole life insurance premiums may be anywhere from 5 to 15 times higher than the premiums for term life insurance, depending on the insurer.
Another disadvantage is the overall death benefit is smaller than term life insurance. For families with greater financial needs, the payout from a whole life insurance policy may be insufficient.
What is Term Life Insurance?
Term life insurance covers only a fixed timespan. This is a type of temporary insurance with a defined end date. The average term life insurance policy is scheduled for 10, 15 or 20 years. It can also be used to provide life insurance cover for someone until they reach a specific age, such as the age of retirement.
The death benefit is paid if the policyholder passes during the lifespan of the policy. If the policyholder does not pass, the beneficiaries will not receive any death benefit.
There are more flexible term life insurance options, however. Renewable term allows for the policyholder to renew their existing policy after it expires. Convertible term enables the policyholder to switch from term life insurance to a different plan.
Pros of Choosing Term life Insurance
The main reason to opt for term life insurance is the lower premiums. Since the coverage has an expiry date, term life insurance will always have lower premiums than whole life insurance.
Premiums do vary, however, based on the applicant’s age, any pre-existing health conditions and whether they are a smoker.
Due to the fact there is no cash accumulation within the policy, death benefits are far higher than whole life policies. This can be advantageous if there is still a mortgage to pay or the kids have yet to go to college. Finally, due to the presence of a convertible term, policyholders are able to convert their term life policy to a whole life policy after it expires.
Term Life Insurance Cons
The main drawback of taking out a term life insurance policy is that it is temporary. If the policy expires and it is not convertible, the insurer will pay nothing. There is also no cash value accumulation, so if the policyholder outlives the policy those premiums have gone to waste.
Applicants must typically submit to a medical examination prior to being accepted. This is a hassle and can mean paying higher premiums than expected if any pre-existing conditions are detected. Although term life policies can be renewed, the policyholder is required to re-qualify each time. There is also no guarantee the premiums will stay the same.
Biggest Differences in Term vs. Whole Life Insurance
The greatest difference between term and whole life insurance is that term life insurance is temporary and whole life insurance is permanent. Anyone who has held both types of policy will also notice a large difference in the premiums paid. A holder of a whole life insurance policy will pay significantly more simply because it is a lifetime policy.
Talk With MFE Insurance For More Info On Term Vs Whole Life Insurance Pros And Cons
There is no such thing as the ‘best’ policy. Both term life and whole life insurance policies have different uses. It is up to you to decide which type of policy best fits your current situation.
Contact the life insurance experts at MFE Insurance to get tailormade advice on the ideal policy for you.