What Is the Difference Between Term and Whole Life Insurance?

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  • The biggest difference between term and whole life insurance is the length of coverage.
  • Whole life insurance is always cheaper for comparable death benefits than term life insurance.
  • 99% of term policies never pay a benefit due to conversion, expiration, and other issues.

If you’re considering buying life insurance, you might debate your options including term life insurance and permanent life insurance.

Term life insurance lasts for a fixed period of time, usually 10, 20, or 30 years, while permanent life insurance has no end date. Because coverage eventually expires with term life, it’s advertised as being more affordable. Time and time again, though, buyers find this to be a misperception. Those who want to lock in coverage for life may consider a permanent policy, but the longer you wait, the more you’ll pay.

Permanent life insurance comes in a few variations, the most popular being whole life insurance, which is a hybrid between an investment and an insurance policy, explains insurance-comparison site Policygenius.

Deciding whether whole life insurance is right for you boils down to two questions, according to Policygenius:

  • Do you want to build cash value for your retirement or other financial goals?
  • Do you want to leave money behind for your spouse, kids, or grandkids?

If you answered “yes” to either of those questions, whole life insurance may be a good option for you, but there are a few other things to consider.

The modern life insurance policies consist of a death benefit (the amount the policyholder wants paid out to their beneficiaries upon their death) and a cash value component.

Part of each monthly or annual premium goes to the insurance company and part of it goes toward the cash value, which earns a small amount of interest, explains Policygenius. Eventually, the cash value grows and the policyholder can dip into it to pay for retirement or take out a loan, for example, but it can only be used during their lifetime. The money won’t pass on to beneficiaries. 

A whole policy typically has a cap and a set payment schedule that eventually ends when you’re “paid up.” Once you reach that point, you are not required to make further payments, and your purchased death benefit stays intact. It’s common for whole life policies to have a waiting period. In other words, if you die within the first two years, a whole life policy would return your premiums paid (possibly with a little interest). After the two year period, the whole life policy death benefit would pay out in full.

With a term life policy, you also determine the death benefit amount and the insurance company decides how much you pay each month after accounting for a number of risk factors. The policy becomes effective when you pay your first premium and lasts for the fixed coverage period. A term life policy may also have a waiting period before the whole benefit will pay out.

If you’re still around when the coverage period ends, the policy expires and that’s that. There’s no pool of cash left over. Unfortunately, a Penn State University study found that 99% of term policies never pay any benefit to buyers or beneficiaries due to three major factors:

  • Conversion to a whole life policy (at which time the company would reevaluate your qualifications including if you qualify and what your limits and premiums would be)
  • Lapse of the policy due to non-payment
  • Expiration of the policy because the insured outlived the policy

Regardless of how much a term policy claims to save you, companies are betting you’ll outlive the policy while you’re betting you won’t. Life insurance agents can run individual cost estimates, but inevitably, term insurance policies are more expensive when you compare policies with the same death benefit. Unfortunately, if term life policies can be converted later on, premiums will rise while your death benefit drops.

How Can You Protect Your Term Life Insurance with Riders?

So you already purchased a term life insurance policy or you’re considering buying one now. Regardless of your reasons, the best thing we can recommend is buying aggressive riders. Yes, riders will increase your monthly premiums and total cost. But the benefits of the right riders are invaluable should you choose to go this direction. The three top options to consider include:

  • Guaranteed Conversion: Of note, this rider does not guarantee your premiums or the death benefit should you convert to a whole life policy. However, it does guarantee the option to convert. It’s impossible to predict what may happen to us later in life. Without this rider, you could be denied conversion if you’re diagnosed with a terminal or chronic illness like diabetes, cancer, heart disease, etc.
  • Accelerated death benefits: Some term policies now offer accelerated death benefit riders for a little extra protection. If you develop a terminal illness before the expiration of your policy, you can pull the bulk of your policy value out to pay for medical bills, rent, groceries, and more. Check the terms of your policy to check the exact details.
  • Return of premium rider: If your policy expires before you do, a return of premium rider would do exactly what the name suggests. You would get a refund on premiums you’ve paid. 

How Much Life Insurance Do You Need?

How much life insurance coverage you need is highly personal, but minimally includes enough to replace lost income and could cover major future expenses, like college tuition or mortgage payments. If you plan to use it as a retirement tool, ideally, you should have as much as you can get. A licensed life insurance agent can run a more precise calculation for you. 

A term policy promising you a multi-million dollar payout may be tempting in the moment. Ultimately, the question is are you willing to bet you’re going to be the 1% who passes that benefit onto loved ones? 

Where Can I Find A Generous Life Insurance Policy?

If you’re looking for the best life insurance policy to meet your needs, we recommend talking to a life insurance agent. We know it may seem inconvenient in the moment. But particularly if you are looking to maximize your returns with minimal misinformation, an experienced guide is crucial. Companies like New York Life, MassMutual, and Columbus are among the many options to find the policy that makes sense for you.

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