Term Versus Whole Life Insurance: Which is Better for You?
Just about any good solid financial plan should include life insurance. If the policy holder should pass away, proceeds that are received by beneficiaries of a policy may be used in various ways – including the payment of final expenses, the paying off of debts such as credit card balances, the funding of a child’s future college education, the payoff of a mortgage, and/or filling in the gaps that are left by the decedent’s lost income.
In many cases, one who dies without having life insurance can leave their loved ones in a very difficult position – often requiring substantial lifestyle changes, the taking on of additional employment, and possibly even the loss of the family home.
Term or Whole Life Insurance – That is the Question
Although there are numerous policy variations, there are two primary types of life insurance products that are available in the market today. These include term and permanent insurance.
What is Term Life Insurance?
Term life insurance is typically considered to be a type of “temporary” coverage. With term life insurance coverage, the policy holder will typically pay a set amount of premium for a certain amount of time – or term – in exchange for pure death benefit proceeds if the insured dies while the policy is in force.
There are numerous term life insurance policy durations to choose from – ranging from just one year to more than 20 years. In addition, there are several different death benefit options that may be chosen – such as level, decreasing, or increasing.
For example, a policy holder who chooses a level death benefit will have the same amount of coverage throughout the term of the policy, whereas a policy holder who chooses decreasing or increasing coverage will have a death benefit amount that falls or rises over time.
Due to their pure death benefit protection, term life insurance policies do not provide any type of cash value build up within the policy – and because of this, the premiums are typically lower on term life insurance than for a permanent life insurance plan with a comparable amount of death benefit protection. This is especially the case if the insured is young and in good health when he or she obtains the term life insurance policy.
Although term life insurance can be an inexpensive way to obtain life insurance coverage, there is a key drawback in that once the “term” of coverage has expired; the policy holder will be required to re-qualify for the policy if he or she plans to maintain their coverage. Provided that the insured is able to qualify based on health factors, the policy premiums will typically increase due to the insured’s then-current increased age.
Permanent life insurance offers the policy holder a death benefit, along with a savings or investment component that is within the policy. Permanent insurance is so named because – as long as the premiums are paid – the policy will remain in force throughout the life of the insured.
What is Whole Life Insurance?
The most basic form of permanent insurance is whole life insurance. Those who own a whole life insurance policy will obtain death benefit coverage, as well as an underlying cash value component that grows at a guaranteed rate, with the added advantage of the funds growing on a tax deferred basis.
Because whole life insurance policies typically provide more than just pure death benefit protection, the premiums are oftentimes higher than a term life insurance policy that offers a comparable face amount. However, because whole life insurance plans do not end at a specific point in time, these policies often provide a great deal of peace of mind in knowing that protection will always be there for the insured’s loved ones.
Evaluating Your Specific Life Insurance Needs
Because term and whole life insurance both have advantages, either may fit into one’s overall financial plan – depending on the person’s specific needs. For example, if an individual wants to ensure that his 15-year home mortgage will be paid in full should he pass away, a 15-year term life insurance policy may be the best option.
Conversely, if an individual wants to ensure that estate taxes will be paid with the proceeds of a life insurance policy – but their need for such proceeds may not be for many years in the future – then a whole life insurance policy is likely the better choice.
In any case, it is important to have a good understanding of how much will be needed from a life insurance policy. Potential expenses that one should consider covering via life insurance proceeds will typically include:
- Final expenses such as a funeral, head stone, and cemetery plot
- Final medical expenses due to an accident or extended illness
- A home mortgage for loved ones who will remain in the family home
- Future college expenses for a child/children or grandchild/grandchildren
- An amount that is sufficient to be used as income replacement
- The payment of estate taxes
In addition, those who are business owners may also wish to consider obtaining life insurance where proceeds may be used to keep the business afloat while seeking a replacement or while conducting the sale of the company. We have an article on business uses for life insurance.