Term vs. Whole Life Insurance: What’s The Difference?

It's best to know why you need life insurance. If your reason for needing insurance is limited, such as a home loan or the cost of college, you can easily find coverage that meets your needs through term life.

For life insurance coverage that continues indefinitely, it is time to think about the lifelong cash values in permanent life insurance products. Aside from whole life insurance, universal life insurance can offer lifelong cash values, making it a much less expensive alternative to whole life.

Term vs. Whole Life Insurance: Overview

Term life insurance

A series of pre-determined term life insurance guarantees locks in the premium rates for a specific period of time, such as 10, 20, or 30 years. After the initial period is up, you can generally renew the term policy, but your premium rates won't be fully guaranteed. Premium rates will increase annually that you renew the policy and could quickly become unaffordable.

Term life insurance policy customers must decide on the contract's duration and the amount of coverage.

Life insurance policies come in a range of types:

• Level term: The rates, terms, and benefits for a life insurance policy are fixed throughout the level term period. After this period ends, premiums will increase every year. Alternatively, you can get a quote for a new policy if you feel that you still require life insurance.
• Annual renewable term: Anyone who owns a term-life policy must re-up it each year from the start, but the premiums increase with age.
• Decreasing term: The death benefit remains consistent throughout the term of a decreasing-term life insurance policy, but the premiums stay constant with the term. One type of decreasing-the-term life policy is mortgage life insurance. Your death benefit decreases as you pay off your mortgage, however, your premiums remain the same.
• Return of premium term life: Term life insurance policy premiums are returned when this policy expires. Term life insurance is significantly more expensive than other forms of life insurance coverage.

Benefits of term life insurance

• Costlier than whole life insurance, although premiums are locked throughout the level term. 
• Guaranteed death benefit amount.
• Costlier than whole life insurance, although premiums are locked throughout the level term. 
• If you are searching for a specific insurance solution for your income-earning years, this can be a beneficial option.
• It may be an appropriate choice if you have a timeline, such as a mortgage. 
• It is often possible to convert term life insurance to a permanent policy.

Drawbacks of term life

• If you need life insurance coverage after the guarantee term, renewal premiums might be too expensive. 
• You cannot access cash value while you're alive.

Whole life insurance

Whole life insurance is a kind of permanent life insurance that remains in force as long as your payments are made.

When paying for a whole life insurance policy, you're purchasing a cash value insurance policy. The cash value component slowly accrues throughout the life of the policy. You can make a withdrawal or loan from this cash value or elect to surrender the policy and receive the full cash value.

Benefits of whole life insurance

• Fixed premiums will hold to your budget. 
• cash value will be acquired at a fair rate. 
• Guaranteed life coverage for a death benefit. 
• The rider feature that accompanies life insurance policies allows for extra coverage, such as accidental death and provides coverage for dismemberment.

Drawbacks of whole life insurance

• Term life is more expensive than cash-value life insurance. 
• The death benefit decreases if you cancel the cash value or fail to repay the loans you have taken from it.

Comparing Term Life vs. Whole Life Insurance

Premiums

Both level-term and entire-life insurance have level premiums. This results in knowing exactly how much you will need to pay, and level premiums allow you to make hassle-free as well as consistent payments. Life insurance companies usually offer payment alternatives such as monthly, quarterly, semi-annually, and annually.

If ongoing premiums for whole life insurance aren't within your budget, some policies offer shorter payment schedules, along with more frequent installments, such as single premium whole life insurance coverage. This allows you to have more breathing room in the future.

Payouts

Death benefit payments and premiums are guaranteed and do not change when they pay. A death benefit is usually paid tax-free to your beneficiaries.

The primary difference is that coverage ends with term life insurance when you choose not to renew it every year after the level term expires.

Cash value

The guaranteed built cash value of a term life insurance policy is the reason why it's generally more expensive than a whole life policy.

The policyholder can take cash from the available cash value. You can borrow against the cash and pay for anything you want. Or you can take money that you won t pay back out from the outstanding sum as a withdrawal. The outstanding loan amount is deducted from the death benefit if you do not pay it back.

Cash left over generally reverts the insurance carrier to you when you die. Benefit recipients receive the face value of the policy minus the cash value withdrawn from it and not reimbursed.

If you are looking for lifelong coverage without the high cost that a whole life insurance policy requires, consider guaranteed universal life insurance.

Ending a policy

While you're attempting to anticipate upcoming financial expenses, you might discover that you no longer need life insurance. Term insurance offers you the chance to stop making contributions and terminate the policy. With no such thing as cash worth, there is no money to be withdrawn.

You can just cancel the payment of a full life insurance policy and stop paying the premiums, but this may not be the very best approach. The life insurance company will likely use the remaining cash value to pay the premiums on your behalf until the cash value is depleted. Rather than leaving, contact the insurer and request the surrender value, which is cash value minus the surrender fee.

Can I Change My Mind and Switch Life Insurance Policies?

You might find that you selected a policy no longer fits your needs years down the line when purchasing life insurance. It can happen. Changes in your financial position or life circumstances can render a life insurance policy obsolete.

Changing term life to whole life

Term life policies sometimes feature a conversion option that allows you to convert your policy to a permanent life policy. There's a deadline for doing this, so check your policy for the conversion period. Your life insurance policy may have many different choices for permanent life insurance for the conversion.

Changing whole life to term life

If you have accumulated cash value in your whole life insurance policy, you can request your insurer if you to be able to use the cash value to switch over to a term life policy that has been paid up and have the whole life insurance plan terminated. Your insurer can let you know the length of the new term life policy based on the cash value of your whole life insurance policy.

Life Insurance Alternatives

There are many other types of life insurance aside from whole life insurance and term life insurance. Permanent life insurance is a kind of life insurance that ensures a life-long approach. Here are the fundamentals of universal life insurance coverage.