Whole
vs Term Life Insurance: A Comparison
 Although
many of America’s aging population have become wary of Term life
insurance, many companies continue to sell more Term policies than
any other kind, The reasons are obvious. Term is available at extremely
high face values—as much as a half million dollars—at cheap premiums
when compared to the same face value on a whole life policy. Furthermore,
while the policy builds no cash value, it does have a wide variety
of riders available, and—in certain circumstances, could actually
become a whole life policy. The temporary ease and convenience of
Term Life, however, may be offset by premium increases resulting
in an abrupt loss of the policy, when the initial term reaches maturity.
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Term
Life
(specified length/ no cash value) |
Whole
Life
(permanent / cash value)
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Defining: |
Term
life provides a benefit to your loved ones in the event of
your untimely death—which must occur during the period of
the term. It is temporary coverage, rather like renting.
"Level"
Term is the most popular since premiums stay level for the
term of the contract. |
Whole
life insurance provides a benefit for your entire life, or until
the policy “endows” which, nowadays, is at least age 100 and
may be age 120. If you live beyond that, the company will pay
off the entire face value to you. Since the policy builds cash
value, it also provides a source of emergency funds—via a loan—during
your lifetime. Of course, the loan decreases the face value. |
| Features: |
Available
in 5 year (level) increments with a few companies offering
30 year terms to younger clients. Age and health are factors
Can include
riders such as spouse terms, children's term, disability waivers,
disability income, extended term, and others
Inexpensive
when initially compared to the price of whole life, but increasing
rapidly in price—usually exceeding whole life if renewed after
the initial time period
Conversion
features: All term policies must have conversion features,
allowing you to convert the Term to anything else the company
offers. The conversion will not involve medical underwriting,
but will usually be very expensive.
Will lapse
of payment is not made within 30 days of the due date
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Lasts
your entire life
Has
the same riders as a Term policy along with some additional
riders with some companies
Can
purchase large face amounts for a higher price. Health and
age are factors
The
premium and face value are unchanged as long as you live.
Has
restoration features in the event of non-payment
Some
companies automatically convert your policy to a reduced paid
up based on the accumulated cash value.
Others
will use the cash value to purchase a year of extended term,
after which the policy will lapse.
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| Advantages: |
Inexpensive
Provides
a large amount of coverage in situations where the need
for a high face value is temporary
Can
be added to a whole life policy as a “term rider” giving
you increased coverage for a time period along with coverage
that you won’t lose
Can
convert to a lower face value for a drop in premium
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Excellent
value, especially when purchased while you are young
Premium
that will never increase; face value that will never decrease
Cash value
you can borrow against or take upon surrender of the policy
A few
companies still offer a 10 or 20 pay—meaning the policy is
“paid up” after 10 or 20 years.
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| Disadvantages: |
Is only
fixed for a temporary period. The increase at the end of
the term is often surprising and out of reach for the average
consumer.
Since
there is no cash value, you will be spending a lot of money
over time with nothing to show for it unless you die during
the Term.
Riders
typically expire at the same time as the primary policy,
and some riders are not available.
Not
a source for loans
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Can
be quite expensive if you wait to purchase until your senior
years
Premiums
must be paid until you die, unless you have a 10 or 20 pay
Face
amount cannot be changed
Both
loans and the interest on them will decrease the death benefit.
If you take a loan, you should at least pay the interest
each year.
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| How
do you decide? |
Term
may be the best option for you in spite of the disadvantages.
The following questions will help you determine which type
you need to purchase. If your answer is “yes,” to any of the
following, you should consider whole life instead of Term.
-
Will
I have estate taxes, final expenses, or do I want to
leave educational funds or another type of legacy for
my heirs?
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Do I want insurance funds to be a possible investment
or source of cash in later years?
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Can I afford a premium that is higher than term, knowing
that it will not change in later years?
The
following questions may indicate that you are a better
candidate for a Term policy.
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Am
I trying to pay off a business loan? Would funds to
protect or transfer the business be required immediately
if I were to die?
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Will
my spouse or family member have finish paying my mortgage
or other large debt?
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Do
I have a family for whom a living needs to be provided?
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Will my retirement funds or other savings be sufficient
for final expenses later in life—once the Term has reached
maturity?
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Do I have limited funds for purchasing insurance at
this time?
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