Term vs Whole Life Insurance: What’s the Difference?

Purchasing a life insurance policy is the best way to provide your dependents with a financial safety net when you are no longer around for them. However, there are several options when you consider a life insurance policy and it is important to know the differences before signing the contract. This article will help you understand the differences between Term life and Whole life insurance so you can make the best decision for you and your loved ones.

Term Life Insurance

Term life insurance is the simplest life insurance policy type and costs considerably less than Whole life, however there is an end date. A Term life insurance policy provides coverage for a certain time period you choose, often ranging from a minimum of 5 years up to 30 years depending on age. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you die within the term period, your beneficiaries receive the payout. The policy has no other value.

With most Term life policies, the premium and the payout stay the same throughout the term.

Whole Life Insurance

Unlike Term life, Whole life, the simplest form of permanent life insurance, lasts the rest of your life. This means your beneficiaries are guaranteed a payout no matter when you pass away. In addition, a Whole life insurance policy builds “cash value” which is money you can access while you are alive. The cash value grows slowly, tax-deferred, meaning you don’t pay taxes on its gains while they accumulate. However, Whole life policies come at a steeper premium cost and are more complex. You can borrow money against the account or surrender the policy for the cash value. However, if you don’t repay policy loans with interest, you’ll reduce your payout, or death benefit, and if you surrender the policy, you’ll no longer have coverage.

With a Whole life form of permanent insurance, your premium remains the same for as long as you live, the payout is guaranteed, and the cash value grows at a guaranteed rate. Some policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can use the dividends to decrease your premium, leave them to gain interest, take them as cash, repay policy loans, or buy additional coverage. Dividends are not guaranteed.

Comparing Costs

Since Term life is temporary and has no cash value, it is cheaper than Whole life because, in most cases, you will outlive the term and there will be no payout. Whole life is much more expensive since the payout is guaranteed; the policy has a cash value with a guaranteed rate of investment return on a portion of the money you pay.

Below is a sample of cost comparison for a person, aged 40 with a breakdown of the policy types.

 

MALE, AGE 40 (ANNUALLY)

Policy amountWhole life30-year term life20-year term life
$250,000$3,508$384$210
$500,000$6,910$687$348
$1 million$13,700$1,281$631

 

FEMALE, AGE 40 (ANNUALLY)

Policy amountWhole life30-year term life20-year term life
$250,000$3,008$314$185
$500,000$5,897$553$306
$1 million$11,677$1,026$534

 

For more information call 724-929-2300. We will do the comparing for you and work with you to get you the right coverage for your needs at the best price. Our agents will be able to answer any questions you may have and explain your coverage so you know exactly what you’re paying for.

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