Most people understand that purchasing life insurance is a means to provide a financial safety net for your surviving loved ones when you have passed away and are no longer there to look over them. And many know that just paying for funeral costs could lead to significant financial challenges, let alone the cost of normal living expenses and a mortgage payment. In an effort to help you understand the many types of life insurance, here we’ll consider the difference between whole life and term insurance.
When it comes to life insurance, there are two main types to consider.
Whole Life Insurance – whole life is also known as permanent insurance because it will last a lifetime as long as premiums are paid and the policy will build cash value over time.
Term Insurance – term insurance is the easiest to comprehend because it stays in force only for a period of years and there is no cash value account attached.
Whole Life Insurance Explained
Similar to other types of permanent life insurance policies, whole life has been around the longest and it provides coverage for a lifetime and includes an investment component. The cash value account in a whole life policy earns a guaranteed interest rate and over time, the insured will accumulate funds that can be accessed through policy loans or policy surrender.
The bedrock of the whole life insurance policy is:
- A guaranteed death benefit that is available for life as long as the periodic premiums are paid.
- The periodic premium never changes, even if you become severely ill or must living in a nursing facility.
- The insurance company cannot cancel the policy unless periodic premiums go unpaid.
- The cash value account grows at a guaranteed interest rate.
If your whole life policy is purchased from a mutual company, the cash account can also grow if the company pays annual dividends. You do have options however, the dividends can be taken in cash, you can leave them in the cash value account to accumulate interest, or they can be used to repay a policy loan and buy additional coverage (increase the death benefit).
Life insurance benefits are paid when the insurance company’s investments perform better than anticipated but are not guaranteed.
Here are five things you can do with the cash value in your whole life policy:
- Increase the death benefit
- Pay for a portion of your insurance premiums
- Take out a policy loan
- Invest your cash value in other investment products
- Surrender your policy for the available cash value
Term Life Insurance Explained
Term life insurance is considered temporary life insurance because there is no guarantee the policy will be in force when you die. These policies are purchased in blocks of years such as 10, 20, 25, and 30 year time periods. If you die within the time period, your beneficiary will receive the death benefit. If you die after the policy expires, there is no death benefit payable.
Most insurance companies will offer a renewal policy when the term policy expires but the rates are calculated on your age at expiration and will be substantially higher. Also, the renewal term is for one or five years only.
Typically, term insurance is purchased to cover current debt or future debt like college tuition and funeral expenses. Most independent agents will offer a “financial needs analysis” to help a prospective client determine their actual life insurance needs. This financial analysis is completed by determining the following:
- Mortgage payoff amount
- Outstanding individual or family debt
- Expected costs of college tuition
- The potential loss of retirement savings
- Monthly living expenses for surviving family members
The total of these current and future expenses less any available cash will determine the death benefit needed in the insurance policy.
Today’s term insurance policies can offer more than just a death benefit.
Most life insurance companies now offer riders (optional coverages) that will broaden the coverage of the policy and provide living benefits for the policyholder. Some examples of these available riders are:
Accelerated Death Benefit – this rider is sometimes offered free in a term policy, but if not it can usually be purchased. This rider provides for the insurer to pay a percentage of the death benefit to the insured if they are diagnosed with a terminal medical condition.
Accidental Death Benefit – this benefit provides for the insurer to pay a multiple (usually double) of the death benefit if the cause of death is the result of an accident.
Waiver of Premium – the waiver of premium rider provides for the insurance company to waive the periodic premiums if the insured becomes disabled and is unable to work.
Return of Premium – The Return of Premium rider provides for the insurer to refund all premiums paid to the company if the insured outlives the term of the policy.
The available riders are determined by the insurance company you select and most of them will cost additional premium if you add them to the policy.
Cost Differences between Whole Life and Term Insurance
The difference between whole life and term insurance that is discussed the most is the rates that are charged for each.
Here are examples rates to show the comparisons between these two types of policies.
Term Insurance applicant assumptions: $200,000 death benefit for a non-smoker in good health. 30 Year Term:
These rates are an indication based on the assumptions listed above. For an accurate quote for you actual age, please use our instant quote form in the margin of the page.
Whole Life Insurance applicant assumptions: $200,000 death benefit for a non-smoker in good health. Lifetime coverage:
These rates are an indication based on the assumptions listed above. For an accurate quote for you actual age, please contact us using the contact form on our contact page.
Certainly, there is a significant rate difference between whole life and term insurance. The primary reason for the rate difference is that since whole life is permanent insurance, the company is at a higher risk of paying a claim on the policy.