Life Insurance Explained: Term vs Whole
In my previous life insurance post I discussed the reasons why you may want life insurance, the amount of insurance you should consider, and what type of insurance you should consider. This article will dive into the key differences between the two primary versions of life insurance available to you -- Term Life Insurance and Whole Life Insurance (also known as Permanent Life Insurance).
Both Term Life and Permanent Life Insurance provide a death benefit to the beneficiaries, but that is where the similarities end.
Here’s a chart showing the key differences between the two types of policy.
Term Life Insurance
Term Life Insurance pays a death benefit in exchange for the regular premium payments (for a fixed annual or monthly amount) you make for a specified period of time. Typically policies will last 10, 15, 20, or 30 years. If you die within the term or time period, the policy will pay your beneficiary the specified death benefit amount. This could range from $50,000 to $5 million or more payment tax free to your beneficiary.
Term life insurance is generally the least expensive coverage. The premium you pay depends on your age, the time period you would like coverage, and the death benefit amount. If the term expires and you decide to renew, your premiums will increase. Also, you may have to undergo a medical exam to renew. Depending on the result of the exam, your premiums may be higher.
Whole Life Insurance
Whole Life Insurance is a permanent insurance policy guaranteed to remain in place for the insured’s life as long as premiums are paid. The premiums are level and guaranteed for the life of the policy as long as you pay them. Whole life costs more than term insurance because the policy is for a lifetime, without additional medical exams, rather than a shorter term. Whole life policies have a death benefit amount which does not change (unless a policy loan is not repaid). Whole life policies do not expire (like term insurance) and will stay in effect until you die or the policy is canceled.
Over time, the premiums you pay into a whole life policy will build a cash value that may also receive dividends from the insurance company. The cash value can be taken as a loan or it can be used to help pay your insurance premiums. The loan plus interest must be repaid before you die or it will reduce the policy’s death benefit. Loans can be useful for meeting a major unanticipated expense, but remember to pay it back or your dependents will receive less money at your death.
In my experience, many people between ages 35 and 55 dramatically underestimate the amount of life insurance that is adequate to meet the needs of their surviving dependents.
Which kind of life insurance should I get?
It really depends upon the needs of your dependents and how life insurance fits into your overall wealth building strategy. If you intend to build significant wealth by age 65, then perhaps an inexpensive term policy that stops at age 65 is sufficient. However, if you believe you will have dependents or a spouse beyond age 65 who will still rely on your income and not only your accumulated wealth, you may consider a permanent solution such as whole life insurance even though the premiums will be higher.
You should consult your financial advisor and life insurance agent to discuss the pros and cons of insurance where the premiums are level (as with term or whole life) versus those with cash accounts that may earn a return but have increasing insurance costs across time (as with universal life or variable universal life insurance).
In my experience, many people between ages 35 and 55 dramatically underestimate the amount of life insurance that is adequate to meet the family support and education needs of their surviving spouse, partner, or dependents. A very dear friend of mine passed away last fall and left his family sufficient life insurance. His widow was fortunate and while grieving, did not need to be overly concerned about finances.
If you have any doubt about whether you have adequate life insurance coverage, please schedule a call with me today.