Though the topic of term life insurance isn’t typically party banter, it’s something we must all face, learn, and understand well. After all, our life—and those of our beneficiaries—could depend on it.
Most people don’t take the time to research the ins-and-outs of term life vs. whole life insurance options. And even with the ease of a simple Google search, many misjudge the cost of it.
A Blurry Snapshot
In fact, misconstrued price points are the top reason that most Americans don’t have life insurance.
Research shows that 80% of consumers misperceive the cost of term life insurance.
Millennials, the largest generation to date, overestimate the cost by a whopping 213%. Gen Xers overestimate the cost by 119%.
And it’s not just younger demographics that are sidestepping life insurance, oftentimes for more short-term products or services.
Almost half (49%) of adults age 65 and older said they would rather use their money for recreational activities like dining out, going to the movies, and shopping rather than purchasing some or more life insurance.
It’s apparent that many Americans are not up to speed on life insurance. And there’s a lot to know.
So we took it upon ourselves to break down the most important differences between two common life insurance formats: term life insurance and whole life insurance.
Below, we explore the main differences between the two, as well as some of the pros and cons of each, and how to determine which one is right for you.
But first, for those not completely savvy on the topic of life insurance or are just beginning to navigate the landscape, we’ll lay down some foundational knowledge.
What You Need to Know Now About Life Insurance
In order to understand the depths of life insurance, you must first know the basics.
To start, what is life insurance and how does it work?
Life insurance is a contract between an insurance company, also known as an insurer, and an insurance policy holder, also known as an insured.
The policy is essentially an agreement where the insured promises to pay an agreed-upon premium to the insurer. This is the cost most people pay in the form of a fixed amount per regular pay period.
In return, the insurer promises to pay a designated beneficiary—an appointed person who will receive the proceeds from the insurer—a sum of money when the insured person passes away or, in some cases, faces a terminal or critical illness.
Put more simply, the reason for life insurance is to prevent financial loss for a beneficiary when the insured person passes away.
Each policy lays out different coverage options based on an individual’s circumstances and needs.
As mentioned above, life insurance comes in all different shapes and sizes. There are three types of life insurance to consider:
- Term life insurance
- Universal life insurance
- Whole life insurance
But for the sake of this article, we’ll narrow it down to the first two basic types: term life insurance and whole life insurance.
Let’s jump into term life insurance first.
Term Life Insurance
Term life insurance is a temporary coverage option.
It’s laid out in specific time frames based on the individual policy. Coverage can last for 10-, 15-, 20-, 25-, or 30-year term lengths.
Term life insurance is much less expensive than a permanent policy of equal value, making it a popular choice.
Why It’s Cheaper
Why is term life insurance significantly cheaper than its alternative?
Say you bought a 10-year policy. If you pass away during that 10-year period, your coverage will pay out the death benefit.
However, if you live past those 10 years, the policy will simply expire and your life insurance will end.
There is a better chance of a temporary policy expiring than of the insurance company having to pay out a death benefit.
Because of this, insurance companies can afford to charge less for temporary plans.
With that being said, the premium for term life insurance policies varies depending on age and risk. So, premiums will most likely increase with age.
The cheapest policies are usually the 10-year terms. (If you’re interested in learning more, here are the Top 5 companies for 10-year term life insurance.)
When a term life insurance policy expires, the insured can opt to renew it or even switch over to a permanent policy.
However, when renewing a policy, the terms are likely to change considering you’ll be older and more at-risk, and the cost will rise each time you renew.
When It Benefits You
Since term life insurance plans are generally cheaper, it makes sense to opt for the temporary route.
But aside from saving money while still getting valuable coverage, there are other circumstances where term life policies make sense.
This is a good option if you’re covering a child’s insurance up until a certain age, such as when they can afford to pay for their own plan.
A temporary insurance plan is also beneficial for limited-time financial responsibilities, such as a mortgage payment or college expenses.
Some people even choose to supplement a permanent policy or work policy with a temporary one for better, more comprehensive coverage.
Another option, classified under term life insurance, is what’s called no medical exam life insurance. Just as it sounds, this type of plan is a way to get coverage without having to take a medical exam.
No medical exam life insurance is a newer form of coverage, and not all insurance companies offer it. But it’s worth looking into.
While term life insurance has many benefits, it’s also important to learn more about its alternative, whole life insurance, for comparison.
Whole Life Insurance
Whole life insurance is one of the most common types of permanent life insurance.
The Basics of Permanent Life Insurance
Permanent life insurance means the policy remains in effect for a person’s entire life.
While whole life insurance policies are more expensive than term life policies, it also acts like an investment.
How does this work?
A fraction of each premium you pay on permanent life insurance goes into an account known as the policy’s cash value.
The cash value continues to grow on a tax-deferred basis until you need to withdraw or borrow any amount from the policy.
Though this sounds great in the long run, a downside to permanent life insurance is that the regular fees you pay add up over time. This reduces the value on your annual return of the investment.
The Benefits of Whole Life Policies
Whole life policies are the most expensive life insurance option available.
Basically, what you’re paying for is a guarantee. This includes a guaranteed death benefit, a fixed annual premium, and a guaranteed rate of return on your investment, or cash value.
Whole life policies are locked in and cannot fluctuate.
When It Benefits You
Aside from having a fixed annual cost and guarantees for life, whole life policies have other benefits as well.
These policies are good for those with long-term or permanent needs, where temporary coverage is out of the question.
It also benefits those not willing to pay increased premiums throughout the years.
If you’re still unsure about the ins-and-outs of temporary versus permanent life insurance options, you can check out more information here for content and quotes.