Term vs Whole Life Insurance
Written by Cooper & Friedman PLLC on January 12, 2021
Life insurance can help you make sure your dependents have financial support in the event of
your death. According to the Insurance Information Institute, about three out of five people in the
U.S. have some kind of life insurance coverage. Interestingly, many people think life insurance
is more expensive than it actually is, especially younger adults. Based on data from the 2018
Insurance Barometer Study, 44 percent of Millennials thought life insurance cost five times more
than the actual price.
There are numerous kinds of life insurance products that you can choose between with varying
kinds of coverage and degrees of complexity. However, there are two main types of life
insurance- term and whole- that you may find yourself choosing between. Here’s what you need
to know about these options.
Term Life Insurance
Term life insurance gives you coverage for a specific period of time, or term. Basically, if you die
within the term limits of a term life insurance policy, your beneficiaries would receive a payout.
You can choose terms from 10 years to upwards of 40 years. Additionally, you can choose an
amount of coverage, from as low as $100,000 to millions of dollars. Most of the time, both the
premium and the coverage amount will stay the same over the duration of a term policy. The
term length and coverage amount determine the premium. As such, longer term coverage is more
expensive, as is a higher coverage amount. Overall, term coverage is cheaper than whole life
insurance- premiums are usually pretty low comparatively.
The coverage amount represents the payout beneficiaries receive in the event of your death
within the defined term. It’s sometimes called a death benefit. That’s the only potential value in a
term plan. Once a plan term expires, you and your beneficiaries receive no accrued value or
benefit. Because of this, term coverage can be the best fit if you have a definite period of time in
which you want coverage, like until you retire. The idea is that if you die unexpectedly while
providing income for a family, the death benefit could help replace that lost income for your
household. So, this insurance may be a good fit if you know others will depend on your income
for a defined period of time (your retirement, kids moving out of the house, etc).
Whole Life Insurance
Whole life insurance differs from term in that it gives you coverage for your entire life. The death
benefit amount for this policy is guaranteed, such that upon your death beneficiaries will receive
the benefit. Additionally, these policies contain a tax-deferred investment component that
policyholders can access. This is called cash value, and it can accumulate tax-deferred interest.
Dividends can be reinvested here, and you can also withdraw funds up to the amount you’ve
paid in premiums tax-free. Plus, you can borrow against the cash value.
Compared to term insurance, whole life is significantly more expensive. Premiums are much
higher than term because of the guaranteed death benefit and ability to grow cash value. Still,
this insurance may be a good fit in some situations. For instance, if you have maxed out
retirement savings in a 401k and IRA and want to continue saving for retirement, whole life can
make sense. It can also be a good way to diversify your portfolio if you already have a
significant amount saved for retirement.
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