Term Insurance vs. Whole Life Insurance - The Right Choice

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When we talk about life insurance, a lot of questions come to mind that can often baffle us.

“What is term insurance?”

“What is whole life insurance?”

“How can I get the information I should have in order to make the right choice about the type of life insurance for you or maybe your family or other loved ones?”

This thread will give you a brief description of these two very popular types of life insurance policies so that you can get a fair idea of what might be the good pick for your needs and requirements.

Whole Life Insurance vs. Term Insurance: The Differences

Deciding whether to opt for a whole life or term coverage policy is a decision that is personal to everyone and should be based on the financial goals of the policy seeker as well as the financial needs of your beneficiaries.

Life insurance is a financial product that is extremely flexible and also powerful. It can help you in meeting with various financial objectives you may be having. Be it providing your loved ones with financial security or leaving behind a legacy.

Here are some of the key features of both whole life and term coverage.

Features of Term Insurance

  • It provides the policyholder only the death benefits.
  • It only pays out the benefits if the insured individual passes away only while the policy is in effect.
  • It is the most simple type of life insurance and is also the most affordable.
  • It is bought for a specific period known as the “term” of the policy, it can be 5,10, 15, or 30 years.
  • The premium charged increases with your age.
  • If you want coverage beyond the term decided, you must renew the policy.
  • It can also be used as a temporary add-on coverage to your existing permanent life insurance
  • It can be converted into whole life insurance.

Features of Whole Life Insurance

  • It provides you coverage for your entire life.
  • It provides the holder with death benefits as well as with a cash value that is accumulated during the entire life of the plan.
  • Generally, you are required to qualify for the coverage after passing a medical examination.
  • Some providers allow you to buy it without the health examination, but the cost for the same is higher.
  • It usually takes a period of up to 12 or 15 years to build up a good cash value.
  • It can be a good investment avenue for estate planning.
  • The cash value of these coverage plans is based on the worth of the return on investment.
  • Some providers allow the insured individual to withdraw a portion of the accumulated cash value during the life of the coverage policy.
  • Initially, this type of life insurance has more expensive premium charges as compared to term insurance, but it can potentially lead to savings in the long run if it is in force for a good number of years.

Whole Life Insurance vs. Term Insurance: Variables and Considerations

When you are in the midst of making a decision whether to opt for whole life or a term coverage, there are some variables that you should take into account. You can also seek the help of a professional in order to help you evaluate the following aspects of your current scenario and determine which out of the two coverage policies is the right choice for you. Some of the factors that you need to consider are:

  • Your current age
  • Your current health status
  • The financial needs of your loved ones
  • Your children’s age
  • Any long term expenses for health you may have planned in case of a serious illness
  • Current mortgages and debts
  • Future requirements of your beneficiaries (for example expenses for your child’s further studies)
  • The age you plan to retire in and the plans currently in motion for your retirement
  • Any additional savings plan you might require for your retirement
  • Your estate plans and concerns
  • If you wish to donate a part of your life insurance proceeds to a charity
  • How you feel about paying the premium charges towards a term policy knowing you will not receive any value back at maturity if you survive the term

For instance, if you are an individual, who is about 35 years old with young children, and being the breadwinner of your family, you might want to consider opting for a term insurance coverage that will help in completely covering the financial obligations of your family.

Adding up the living expenses along with any mortgages you may be holding, the payments of your debts, along with your children’s future education costs will help you get a better understanding of the face value of a policy that your loved ones would require in case of your untimely demise. The tenure of the policy depends on the age of your kids and when you think they will be completing their further studies.

On the other hand, you can opt for a whole life coverage that will not only give the payout to your beneficiaries if you are no longer around till your child is out of college, but will also accrue cash value that would provide additional benefits to your loved ones or will act as a growing fund for any emergency financial needs.

If you are starting to consider opting for a life insurance policy at the age of, say, 60, your kids are most likely to be grown up and financially independent, and your needs are quite different. You might be needing a coverage policy that is short term and sufficient to cover your financial expenses, or you might be needing cover that will help in providing a financial cushion for your partner’s needs if you are not around anymore.

There are numerous flexible and creative options for life insurance coverage in the market that can meet your requirements.

Side By Side Comparison

Now that by this point you are much clearer about the differences between whole life and term insurance, you probably would want to get onto comparing the costs of both these coverage policies. To do this, you need to directly compare the short run and the long run costs of whole life insurance and term insurance, based on various factors such as your age, the face value that you require, and your smoking habits.

You may find that the whole life insurance prices comparatively daunting as opposed to the costs of a term insurance plan. The main reason behind this is that the premium charges that are paid towards term plans are only there to provide your nominees with a death benefit if you pass away during the tenure of the policy. Whereas, the money that you put in as an investment in the premiums charged on the whole life plans builds a cash value that can be used later in life by the policyholder or be added to the death benefit payout.

The portion of your costs that are proceeded towards the accumulation of the cash value increases every year.

Conversion of Term Life into Whole Life Policy

Most of the term policies out there allow the policyholder to convert into a permanent life insurance policy such as the whole life plans. However, is it the right choice to do so? Well, that depends on your needs. Some of the reasons why it may be a good idea to opt for this conversion are:

  • Your term plan is about to expire and you are aged around 50 to 60 years.
  • You want to extend the coverage of your life insurance, but the choice of opting for a term insurance plan may not be available or may have become too expensive.
  • You are working towards setting up an estate.
  • You are planning to set up a trust in your will.

Converting your term plan into a whole life plan can be a good way to continue your life coverage policy while building up cash value at the same time, that can also be used in case of any financial emergency that may occur in the future.

There are numerous ways by which you can structure this policy, depending on your financial goals along with your needs and requirements, so you should assess your needs properly and if needed get help from a professional before moving forward with any decision. 

You may also like this - Should You Convert Term Insurance to Whole Life Insurance?

So, Should You Buy Both Whole Life and Term Life Cover?

You can opt for both – whole life insurance and term insurance at the same time also. People who are thinking of choosing this option generally are already owning a whole life coverage. However, they may find themselves under certain scenarios where they think an additional coverage policy for the short run would do them good.

If you are someone facing this, a term plan can be a good option to go with for that additional coverage.

Or, it is also possible that you may be having an existing term policy and you find yourself to be thinking to invest some additional funds into a longer run investment avenue for purposes such as retirement, or estate planning. In this scenario, opting for a whole life coverage policy that helps in the accumulation of cash value may be a good choice to make.

The Final Say

Now that you are clearly aware of the differences between the term insurance policies and the whole life insurance policies, you can go ahead in making an informed decision in order to find the best life coverage solution for you and your dear ones.

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