Is Term Life Insurance Better Than Whole Life Insurance?
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Let's face it: Life insurance is not necessarily the most exciting topic of discussion. But with hard-earned money at stake, researching the nuances of term vs. whole life insurance is well worth your time. Neither is inherently better than the other, but the type of life insurance you choose should depend on your situation and what you hope to get out of the policy.
In this post, we'll take a deep dive into why term life insurance might be the best option for you. We'll discuss the different coverage options for both types of insurance and compare their pricing and features to determine which type might be the best fit for you in the long run.
In this article
Introduction to life insurance
Life insurance is an important way to provide financial protection for yourself and your family. It provides security in the event of unexpected losses due to death, disability, or retirement. Choosing the right type of life insurance can be daunting; however, understanding the differences between term and whole life insurance will help you select the best product for your situation.
Term life insurance policies are typically written for a specific period of time (usually 10, 15, 20, 25, or 30 years). During that period, if the policyholder dies or upon reaching a certain age (often 70), there will be a payout of the face value amount to their nominated beneficiary and dependents. The premiums are usually affordable, making obtaining larger amounts of coverage easier than other types of life insurance. Whole life insurance often comes with a lower premium payment but builds cash value on a tax-deferred basis offering greater flexibility in terms of survivor benefits and more predictable fees than term life.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
Different types of term life insurance
There are two primary types of term life insurance: level term and decreasing term. Level term indicates that the death benefit remains the same throughout the duration of the term, and decreasing term indicates that the death benefit decreases over time.
Many experts argue that, for individual and family financial planning, level term is a much better option than decreasing term because of its guarantee of a higher, consistent death benefit should the policy owner pass away during the length of the policy. However, the argument remains that decreasing term is an affordable way to remain covered for at least some time in case something unexpected happens.
Ultimately, it depends on an individual's budget and family situation as to which type of policy makes more sense for them financially. Moreover, selecting a term life insurance plan with a longer term (25 or 30 years) may be more cost-effective than selecting multiple short-term policies that cost more in aggregate.
Term vs. whole life insurance
The key differences between term and whole life insurance policies are cost, permanent protection, cash value buildup, and consent.
Cost
Term life insurance policies are typically more affordable than whole life policies because they only remain in force for a specified period of time. This means you pay less each year for your coverage while protecting your dependents. Whole life policies, on the other hand, last for the insured’s entire life and come with a significantly higher premium.
Permanent protection
A major benefit of whole life insurance is that it provides lifelong protection for beneficiaries if the insured dies prematurely. With term life insurance, however, death benefits cease upon expiration or can be terminated by the insured at any point during the policy’s duration.
Cash value buildup
Another difference between term and whole life insurance is that whole life policies accumulate cash value over time as a result of regular premium payments. This money can then be borrowed against or used to help pay premiums in later years. There is no such cash value buildup with a term life policy since there is no investment component.
Consent
Whole life insurance offers the additional benefit of allowing the beneficiary to receive their payout regardless of whether the deceased gave prior consent while still alive via an advance directive such as power of attorney. With term life insurance, however, the beneficiary would need confirmation that the deceased wanted them to receive funds before their passing away.
Benefits of term life insurance
Term life insurance is the most affordable type of life insurance policy. It offers a range of benefits to individuals, including the coverage of debts, funeral costs, mortgage protection, and other expenses. This type of policy covers an individual for a specific period of time, typically between 10 and 30 years. If the insured passes away or becomes critically ill or injured during this period, their beneficiaries may receive a lump sum payment to cover any outstanding expenses or debt obligations.
One of the main advantages of a term life policy is that premiums remain relatively fixed throughout its duration. If you choose wisely and purchase adequate coverage from a reliable insurer, your beneficiaries can use the death benefit proceeds to care for immediate needs without making any financial sacrifices. Furthermore, you are not limited to a single policy. In some instances, you may opt for multiple policies covering different terms. This allows you to adjust your coverage as your financial stance changes over time and provide additional support for loved ones when needed without straining your budget.
Finally, term life insurance policies do not require an initial lump sum investment but just annual premiums, typically less expensive than whole life insurance premiums. As such, this is a great way to ensure that your family and dependents will have financial protection should anything happen to you while keeping ongoing costs low.
These are just some of the benefits of term life insurance and why it has become so popular in recent years, but they certainly don't reflect all of them. For example, if you have children or would like to leave money behind for charity after passing away, adding riders and other features to your policy can help ensure your wishes are fulfilled even after you're gone.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
Advantages of a whole life policy
Whole life insurance provides a variety of advantages, not least of which is the guaranteed death benefit. Unlike term policies, the death benefit stays consistent no matter how long you’re alive or how old you are when you pass away. Additionally, many whole life policies also provide policyholders with an additional cash value component that builds over the duration of the policy. This feature gives policyholders potential access to the cash value in the event of a financial emergency or could function as an additional source of retirement income if needed.
Whole life insurance tends to be more expensive than term coverage due to these benefits. Furthermore, whole life may not be ideal for policyholders looking for large amounts of coverage; purchasing multiple-term policies may serve as a better investment if one wants a significant death benefit. Yet for those wanting to guarantee protection and build financial security for their beneficiaries, whole life can provide peace of mind and should be seriously considered.
The costs associated with term life vs. whole life insurance policies will vary based on various factors such as the age and health condition of the insured individual and their intended policy length.
Related: Best Whole Life Insurance of 2023
Costs of term life vs. whole life insurance
When it comes to life insurance costs, most people are concerned with how much they have to pay and which type of policy offers the most affordable option. Although whole life insurance policies last longer than term life insurance policies, their monthly premiums can be more expensive.
Term life insurance covers you for a limited period, typically 10, 15, or 20 years, which means you pay lower premiums than with whole life insurance. This makes term life insurance an attractive option for those who want comprehensive coverage on a budget. Additionally, if specific conditions make it difficult for you to get life insurance in the future, signing up for a long-term plan when you are young could be a wise decision.
On the other hand, while whole life policies cost more than term policies initially, they build up cash value over time and may offer additional features such as living benefits or loan options. Whole life insurance is permanent and never expires, so your beneficiaries are guaranteed to receive some money in the event of your death – no matter when it occurs. For those looking for long-term protection or seeking a multifaceted financial product, whole life may be a good choice.
Ultimately, deciding between term and whole life is not always easy and depends on personal preferences and needs. Costs vary from person to person due to factors like age, health history, desired coverage amounts, and length of the policy.
Comparing investment benefits
When it comes to investing benefits, there is no contest between term life insurance and whole life insurance. Term life insurance has very little to offer in terms of investment benefits compared to whole life insurance. With term life, there is no investment component, meaning you only pay for the policy coverage. Whole life, on the other hand, does feature an investment component, allowing as much as 70% of your premiums to go toward investments depending on the insurer’s guidelines and fees associated with the plan.
When building long-term savings through a life insurance policy, whole life has a clear edge. Whole life can help you build substantial cash value over time, something that term life cannot do. As long as the premiums are paid and kept up-to-date, you will continue to see guaranteed growth in your cash value due to its permanent nature.
Advocates of whole life point out that while it’s true that whole life policies cost more than term coverage, they may be more affordable in the long run because of their ability to provide positive cash flow and reliable returns on investment. However, there are caveats about whether or not this additional expense will be worthwhile for everyone depending on their personal circumstances; factors like age and how much coverage one requires should be taken into account when making a decision about which type of policy is best for them.
At the end of the day, it is hard to argue against the advantages offered by whole life insurance. But there are many factors one must consider before deciding whether or not this option makes sense for them.
FAQs
Are there any drawbacks to choosing term life over whole life insurance?
Term life insurance will only provide coverage for a certain period of time before the policy expires and needs to be renewed or replaced. This could leave you unable to renew the policy if your health has deteriorated significantly in the intervening years. Additionally, whole life insurance policies often build up cash value over time, which can be accessed through tax-free loans or distributed upon cash out. With term life, you cannot access such funds until the policy matures or expires.
What benefits does term life insurance provide that whole life doesn't?
Term life insurance can be a great way to protect yourself and your family during certain parts of your life when you need it most. For example, you may want to purchase a policy if you have young children and are worried about replacing an income if something happens to the family's primary breadwinner. You may also consider getting a policy if you recently took out a mortgage or loan.
What are the differences between term and whole life insurance?
Term life insurance provides coverage for a specific period of time, usually in 5- or 10-year increments. Whole life insurance encompasses lifelong protection and provides death benefit values that remain fixed when the policy is set. Compared to term insurance, whole life has a much higher cost due to its lifelong coverage and additional elements such as cash value buildup over time, which works out as an investment component of your premium payments and can help with retirement planning. The downside is that if you discontinue payments before the end of the policy, you lose your accumulated cash value altogether.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
The bottom line
Ultimately, there are pros and cons to both term life insurance and whole life insurance policies. Term life insurance can provide a safeguard against financial hardship during a person’s period of greatest need. It comes with lower premiums than whole life insurance, enabling individuals to purchase larger amounts of coverage with what resources they have available. Additionally, members can access money from policy loans if needed during their term – though loan interest can reduce the death benefit amount upon maturity.
Whole life insurance policies, in contrast, provide coverage for an entire lifetime. They are permanent policies that build cash value over time, making them beneficial for estate planning. Most importantly, since the policyholder owns the coverage, the death benefit will not be reduced even if they take advantage of policy loans or other account options.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Share this article
