Term Life Insurance Vs Whole Life Insurance: Which Is Better

So you’re looking for life insurance and you’ve heard a lot of different terms being through around like term life and whole life insurance.  Yet you have no idea which is better for you and your situation.  In this article I’m going to help take the mystery out of life insurance.

In this article I’m going to be discussing term life insurance vs. whole life insurance, and giving you all the information you need to make a sound decision when it comes to buying life insurance.

Term Life Insurance Up’s And Down’s

There are a lot of benefits when it comes to term insurance, however it wouldn’t be fair if I gave you just the benefits, but also gave the down side to it as well.

Ups

  • Term is usually cheaper. When you do an apple to apples comparison of a term policy to a whole life policy the term policy will be cheaper every time.   The reason being because term has no cash value fees unlike whole life.
  • You can determine the length of the policy. With term life vs whole life you can determine how long you want to own the policy for.  Typical term policies last between 5 to 30 years.
  • Buy term and invest the difference. This is when you buy term at much lower cost and save the difference of what a whole life policy would have cost you.  However, this is only usually done after someone cancels a whole life policy and switches to a term policy.

Downs

  • No cash value. Term insurance has no cash value making it completely worthless after the policy expires.
  • No return on premium. All the money you pay into the policy is no refundable if you don’t use it.  That’s kind of like renting an apartment but never using it. However there are return of premium riders that can be added to the policy but they don’t usually pay you back the full amount you paid in.
  • No extensions. Once the policy has expired you have to reapply which means you will have to complete a new application and blood test.
  • Cost goes up over time. When your old term policy expires and you have to reapply the premiums will usually be a lot higher especially after a 30 year term policy.

Whole Life Insurance Up’s And Down’s

Now that we know the up’s and downs of term insurance let’s take a look at whole life insurance and see how that fits into the picture.

Ups

  • Has a cash value. First off, when considering term life insurance versus whole life insurance, the whole is the only one that has a cash value.  Cash value basically stands for an account that acquires a portion of the premium payments every time you pay into the policy
  • Whole Life never expires. Unlike term, a whole life policy will never expire as long as you make the payments otherwise the policy will lapse.
  • You get better than average fixed rates. As part of the whole life policies cash value it retains a decent interest rate.  Usually better than what you’ll find at any bank.  In fact, the last I check my whole life policy it was doing 5%.  Not bad.

Downs

  • You pay for your whole life. The biggest down fall to a typical whole life policy is the fact that you have to pay into it for your entire life in order to receive the benefits.
  • Cash value is not universal. In insurance terms, universal means flexible.  This means that the cash value on a traditional whole life policy is not used to help pay your premium payments if you would happen to forget about paying one month.  Variable universal life and equity indexed universal life will typically do this, but not whole life.
  • No market action. As good as the fixed rates are with whole life policies they don’t get any market action unlike other insurance policies, such as a variable universal life policy.
  • More expensive than term. Finally, as I made in one of my earlier points, whole life  is always more expensive no matter how you compare them.

Which Is Better

Now that we’ve seen the facts with term vs whole life insurance, which is better?  The truth is I can’t make that choice for you.  It’s all based on your situation so I’ll give you a few pointers to help you out.

When considering term life vs whole life insurance if you’re a younger individual a whole life policy is usually cheaper and since you are younger you have time to build up the cash value.  However, if you’re someone who is quite a bit older you may want to consider a term policy because it is much cheaper than a whole life policy.

I hope this helps you out in making your decision on which is better, term life insurance vs whole life insurance.  Also don’t forget to talk to your insurance professional he will be able to draw up several illustrations to help you figure out which is better for you.

This post was recently featured on The Money Hacks Carnival by Ultimate Money Blog.

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10 Comments

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  2. Your article does a great job of educating. Thanks, and keep up the good work.

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