Term vs Whole Insurance
If you are confused and want to know what’s the difference between term and whole life insurance you are in the right place.
Knowing the difference is important because that pertains to your family’s protection.
Choosing one type of insurance or another affects your financial life greatly too. That can be positive as well as negative. The fact is both term and whole life insurance policies have their strengths and weaknesses.
So, however small or wide the differences between the two types of policies are, you need to make sure your idea is not vague.
Term Vs Whole Life Are Generic Types
Your head will roll if you get a handbook of life insurance and go through it. There are types and subtypes of policies that insurers sell. Visiting a life insurance website will give you the same dizzying feeling asking you to click from one post to another to understand each.
One surprising truth behind all the types and subtypes of life insurance products is they all fall either in term insurance type or whole insurance category. When brand names appear in lucrative phrases, don’t forget to remember you are being pushed either for term insurance or for whole insurance.
That means term and whole life insurance are two generic types of insurance protection for you.
As explained above, you cannot escape learning the difference between term vs whole life insurance policies.
What Is a Term Insurance Policy and How Does It Work?
No matter you are a native English speaker or not, you assumedly know one of the dictionary meanings of ‘term’ is fixed or limited time period. When you are looking for protection for a particular period ahead, it is the very choice for you. This policy shields your family’s future against your untimely or unprepared death inside of a specific time period. If you happen to die insured within the period, the policy beneficiaries, the family members you nominate, will get the death benefit.
This death benefit is an amount of money that an insurer commits to pay to your family through a written contract. You can typically buy death benefit of up to 30 times your current annual salary to protect your family.
The protection goes void once your purchased term is over. There are term products available for one single year (known as annual renewable term) to five or multiplications of five years. So you can get yourself insured for 5, 10, 15, 20, 25 or 30 years. Few companies sell term insurance beyond 30. But if you want 35 or 40 year term, you will get it.
Sample Cost of Term Life Insurance Policy
Here is a sample cost of term life insurance for $100,000 for 30 years. The applicant is old Finn Ross, a resident of Alabama. He is 25 and has the best health. Finn has never smoked and these contribute to making his insurance cost low:
Plus and Minus Sides of Term Insurance
Term insurance is like an emergency fund for you. This should come to your mind when you think of your family members’ financial security behind you without a solid financial ground left for them. Because creating that security needs some time, you need to find ways for them so that the ‘time’ needed is compensated for. Term insurance is the most trusted way for you for the compensation. Families of around 8% of people who die insured with term insurance are said to be benefiting from their policies. When you figure out the apparently trifle number of 8%, it will amount to tens of thousands of policyholder families. Thus a term insurance is a great refuge for you to protect your family.
When it comes to cost, term is better of the best. It is the most affordable kind of insurance you might never have imagined of. You can literally buy a huge amount of death benefit for a couple of tens of dollars. Check out this life insurance quotes for yourself:
Besides being affordable, term insurance policies deserve praise for its pricing system. Once you are on a term policy, the cost of the policy, aka life insurance premiums, does not take any upward curve. If you start with $10 a month today, you will keep paying the same cost till your last payment. This is why its core type is known as level term insurance.
However, like they say, term insurance is not without its seamy side. On one hand, unless pre-extended, your policy expires on the clock way when the term goes off.
Not only that, even if you choose to extend your coverage, the premiums will jump up to an eye-rolling figure.
A much-criticized characteristic of this insurance is your term ends with no refund or compensation for all the payments you have made to the insurer for years. Thus a term insurance policy is a ‘get benefited’ or ‘get lost’ type of insurance plan.
What Is Whole Life Insurance and How Does It Work?
If you are not in for term life insurance because it is most likely to turn into a ‘get lost’ type, the only best choice for you is whole life insurance. It protects your financial interest for as long as you live or so long as insurance premiums are up to date.
But merely how long you are taken care of does not make whole life insurance. There are more things that come attached to this insurance. Besides handing over the death benefit past your death, this policy also pays you the opposite of it – living benefit. This is also known as cash value.
Your beneficiaries or nominees are eligible to receive the death benefit the same way a term insurance plan would do. No matter when you die, the benefit is out there.
The living benefit feature keeps aiding you so long as you live. Your policy generates bits of profits to add to your cash value that grows up eventually. You are eligible to borrow it out (on interest though) or set it to pay for your premiums.
It is worthwhile for you to know that some whole life policies keep you insured till whenever you die. But some policies will pay you a benefit when you meet a certain age.
Sample Cost of Whole Life Insurance Policy
Here is a sample cost of whole life insurance for $100,000. The applicant is the same Finn Ross, an Alabama-resident of 25 years with the best health and no smoking habit:
Plus and Minus Sides of Whole Life Insurance
For plus, if you are one who is in for the ‘get benefited’ type, whole life insurance is a good idea. All’s all that ends well – is the right saying that goes with the spirit of whole life insurance.
Besides, this policy gives you access to your money. It being an investment type of insurance provides you the freedom to make use of your money the way you want. We invest so may use money when we are in need. You can avail this feature and appreciate this insurance.
But taking a shallow view of the sweet spots can be something you might lament as well. Borrowing is possible only when you have had some cash value in your basket. And, that comes not without price. You pay high interest over the taken-out money that controversially belongs to you.
Sadder enough, failure to refund the money taken out will affect your final pay in a negative way. The loaned out money will be taken out along with all interest incurred. You should not either forget that the so-called cash value grows so tortoise-slow way that the end might not end really well.
Who Should Buy Term Life Insurance?
Like not all shoes fit all feet, not all life insurance policies are fit for each and everyone. The decision for choosing a particular plan or not choosing thereof should come through up with your financial planning taken into view. That means your life situation should be behind the scene. Generally it is good for you under certain circumstances:
You Are Newly Married: Though marriage mythically belongs to heaven, its earthly aspect requires that you take charge of your newly-wed life partner. If you are typically the man responsible for your spouse, you should not blow away the possibilities of airy happenings of life. As to what will happen to your wife if something undesired occurs should be your legitimate concern. Even if your partner is already insured or not a working person, providing security arrangement to her should be in your head. So buy as much life coverage for her as possible. Now the cost will be unimaginably inexpensive and you can keep it up for till you retire well-prepared.
When Babies Are Born: If you have ignored life insurance already, the second best time for you to buy term insurance is when you have become a parent. Think of the child’s future needs from daily expenses to education and buy one term insurance policy. If something unexpected (God forbid) occurs to you, it will be taken care of.
When You Have non-Nuclear Family Dependents: If there are dependents on you like your parents or someone who cannot earn their livelihood for some reason, you can buy a term insurance plan for them. The death benefit will take care of their everyday needs as well as any treatment.
When You Have Mortgage: Leaving a mortgage unpaid behind can prove to be one of the most dangerous legacies you could make. If it there is one, make sure you have a term life insurance behind.
Though you might be suggested to purchase mortgage insurance, a term life insurance is the best solution for you. The reason is you family members can use the term insurance benefit for any use – even to pay mortgage loans. But mortgage insurance pays only for the mortgage.
When You Do Some Hazardous Job: When you are doing a hazardous job, professionally or not, having a term insurance in place is a good decision. Even if you have a car that you ride, you are at risk of meeting unexpected situations.
When You Are Low Income: A term life insurance policy provides you the essential security you need. A whole life insurance plan gives you extra security that you might not really require. That said, if your income is not high, you should buy term insurance to ensure essential security.
When Should You Buy Whole Life Insurance?
Not all men think alike. Some want sustained security for themselves. Some also look for ways to more financial freedom. Whole life insurance is for you when you belong to the group who are for the extra safety. Here are situations wherein a whole life insurance is advisable for you:
When You Think Beyond 65: If you are financially aware, you should have readied yourself for financial security by the time you retire. Most people would do so and won’t require insurance protection beyond the time. But longer protection is not always a bad idea, especially if it comes with guaranteed death benefit at any point of time. You may consider whole insurance for yourself if you are for extended security.
When You Find Living Benefit Attractive: That you can cash out money from your whole insurance plan might prove useful to you. As already stated, your insurer adds some profit to your policy value and lets you borrow it out for personal use or auto-generate premiums from the policy itself. Some people like the idea. However be reminded that the cash value grows very slowly and borrowing comes via interest.
When You Want Your Heirs to Benefit: You might have some worthy reasons to buy whole life insurance. For example, you may have some disabled dependent who would need money behind you. As the death benefit of whole life insurance is guaranteed, you can use this policy to keep supporting the dependent behind you.
When Making Temporary Security: Though whole insurance is for lifelong protection, you can choose to take it out for temporary protection. You can surrender the policy when there is enough cash value accumulation and get refunded. However, the refund will refund only your cash value part. So, this can be seriously disappointing. You can use this aspect when you no more need for protection from life insurance.
The Basic Difference Between Whole Vs Term Life Insurance Explained
Here are the basic differences between whole vs term life insurance:
Term and whole life insurance fall widely apart with respect to the way they each works. You can take a quick look at the chart or read the basic differences between whole and term life insurance here:
A whole life insurance protects you for your longevity. But a term insurance provides you security only for the period you choose it for.
Term insurance works like a shelled life medication. It expires in due time. A whole life insurance is like a herbal plant for your ailment– with no expiry date written on.
A whole life insurance policy is not affordable for most people. Only the able ones can afford to buy it. But term insurance is for anyone in view of affordability.
Term insurance returns you empty-handed when the policy expires. Whole insurance pays you whatever age you die.
The cost of whole life insurance remains unchanged till you pass on. The premiums of term insurance rise in a big way when renew the policy at expiry.
You can turn your term insurance into a whole policy but you can never choose to do vice versa when it is a whole insurance policy.
Whole insurance benefits you from the money you pay for it and this makes your policy a kind of investment. Term insurance does not have such option for you.
Your term insurance policy does not carry any surrender value beyond the look-up period of typical 30 days. You can only give it up after the period. But you can surrender your whole life insurance plan and get refunded.
What Is an Alternative to Term vs Whole Life Insurance?
ROP (Return of Premium) as Alternative to Term Insurance
A return of premium life insurance is the best alternative to term insurance when you are not willing to finally lose your money invested. Unlike the core term insurance, this policy returns or refunds all your premiums when the contract is over. Like any level term insurance plan, this insurance policy also keeps you insured for a term period. If you happen to pass on within the period, your beneficiaries receive the death benefit. On survival, the insurer refunds all your premiums to you.
GUL (Guaranteed Universal Life Insurance) as Alternative to Whole Insurance
While ROP is surely a good option for insurance, you might hate it for being acting like its mother type — level term insurance that provides periodic protection. Also, as you already have learned, further protection will consume more money than the initial payment. Finally, it will typically take away the protection once you reach 80s, leaving the only choice of an extremely expensive plan known as final expense insurance.
If you look for inexpensive ways to get insured and stay protected for longer periods, the best alternative for you is GUL. GUL or guaranteed universal life insurance is age-specific and lets you choose up to 121 years of your age for protection. With life expectancy for males being 76 and females 81 in 2019 in the USA, you may very well hope to get covered if you purchase GUL. On top of it, the cost of this insurance policy is not much higher than general term insurance. You may very well find it an intelligent approach to buy GUL for a golden alternative to whole life insurance.