Life insurance provides financial support to the family of a policyholder when the latter passes away. The family can use the payout money to meet several expenses like rent, education, home maintenance, and groceries and ensure their daily lives aren’t affected. Since there are different life insurance policy types, one must compare and choose the right option. Whole life and term life are the two most common choices to start with.
Whole Life vs. Term Life – Features
When performing a life insurance comparison, one must consider the features of both plans. This includes comparing eligibility, premiums, terms and conditions, and other life policy differences.
Whole Life Insurance
As the name suggests, this policy stays in effect for the entire life of the policyholder or until their demise as long as premiums are paid. This ensures long-term financial protection.
- The premiums are guaranteed, meaning the price does not go up when the policy is in effect. This offers peace of mind and helps one plan their finances better.
- A part of every premium payment goes toward building a cash value component, which the insurance company invests. This amount grows over time with a guaranteed interest rate. While borrowing against this cash value is easy, the family may get a lesser payout if the insured passes away before repaying the loan. Moreover, withdrawing too much could result in a policy surrender and end the coverage.
- The insurance company conducts an examination to assess the insured’s wellness and determine premiums and insurance risks. Some companies may offer no-exam insurance policies, which are ideal for people with preexisting conditions. But this can drive up the premium and reduce coverage limits.
- Mutual insurance companies can pay dividends on life insurance policies. The dividend payments are not guaranteed and are often based on company profits.
Term Life Insurance
Unlike a whole-life plan, term insurance does not remain in effect for the policyholder’s entire lifetime. Instead, it has a specific tenure, generally between 10 and 30 years. Some policies may last until the policyholder reaches a certain age, like 65.
- The premiums for term life policies can change after a set period. Some plans return paid premiums if the individual lives after the term expires. These return-of-premium term life policies are typically more expensive.
- Some term life policies can be converted into a whole life policy. The conversion is allowed at various timelines: at any time during the policy term, when the insured reaches a certain age, or due to other conditions. This is why some term life policies are termed as “convertible terms,” while others have optional riders that allow a conversion.
- Several term life insurance policies feature simplified and accelerated underwriting that may not require a wellness examination.
Which Policy Should One Buy?
Since both life insurance options have unique features, one should think before choosing.
- Whole life insurance is a great choice for someone who wants lifelong income protection for their family. It is also suitable for people looking for an investment option since one can earn interest on the accumulated cash value while still alive.
- Term life insurance is suitable for those who want to provide their family with a financial safety net for a specific period when financial obligations are extensive. This includes raising children, paying a mortgage, or clearing other debts that could outlive the insured during their demise during the policy term.
Factors to Consider When Selecting a Policy
Two important factors should be considered when choosing life insurance options.
Budget
Setting a budget is essential when buying life insurance. Whole life insurance is more expensive but provides coverage until the insured passes away. In comparison, term life insurance is affordable and a great choice for those who require coverage with limited funds.
Long-term Financial Goals
Individuals who wish to build cash value over time and get lifetime coverage can select whole-life coverage. Others interested in an affordable way to protect the family for a specific period can consider term life insurance.
Alternatives to Whole and Term Life Insurance
Based on needs and financial aspirations, other types of permanent life insurance are worth considering.
Universal Life (UL)
A universal life insurance policy accumulates cash value like a whole life policy but is more flexible. For instance, there can be an increase in the benefit paid after demise or a change in premium payments. It also earns money based on one’s investment portfolio.
Variable Universal Life (VUL)
In addition to a payout after one’s passing, this policy has a savings account into which one can invest their cash value component and use it to trade in stocks, bonds, or money market mutual funds. These investment options are subject to market risk, and the cash value or other benefits could decrease. There are, however, some policies that guarantee no drop in payout beyond the stated minimum.
Indexed Universal Life (IUL)
This policy builds cash value based on the insurer’s stock market index. While there is no fixed rate, the policy usually earns a guaranteed minimum. Even here, the insured can borrow or withdraw from the policy and adjust the premium payment and payout.
Final Expense Insurance
Also called burial insurance, this plan has a low payout, between $5,000 and $25,000. It is purchased to cover end-of-life expenses, like funerals, burials, or cremation.
