Deciding which type of life insurance product is right for you can be difficult; regardless of whether you’re considering retaining your current policy or you’re shopping for new coverage, it’s important to note that there are benefits to both term life insurance and whole life insurance.
Which is the best fit for your needs, preferences, lifestyle, and family?
There are some key differences and similarities between these two types of coverage. As for similarities, they both offer a guaranteed death benefit, and they both offer generally federal tax-free benefits. But let’s consider some of the differences between whole life insurance and term life insurance.
Term life insurance is something that you buy into for a specific amount of time. When you apply for term life insurance, you pick the amount of money you want to be paid out to your beneficiaries if you pass away during the length of that term. Then you set up the duration you want the term to last.
The amount of money that is paid out to your beneficiaries is called the face amount. The length of time that the policy’s death benefit remains in effect is called the term length. Most life insurance companies offer term life coverage in 5-year increments between 10 years and 30 years although there are some companies such as AIG that will let you pick a specific length of time such as 17 years.
Premiums are usually paid on a monthly basis, but there are also options to pay annually, which can save you some money over the course of your policy. Once the term is over, your policy “expires”. I put this in quotations for a reason, check the warning below.
WARNING: Term life insurance does not expire in the traditional sense of the word at the end of your term. Instead, it is converted into what is called an Annual Renewable Term (ART) policy. This policy is renewed automatically every year unless the policy owner cancels it. The rates for ART’s quickly become very high and unaffordable within the first few years.
I take the time to warn you about this because I have heard dozens of horror stories of people not knowing about this process which is clearly defined in the terms of their policy, and by the time they find out, it is too late to change, and they have lost a lot of money on a policy with very little practicality.
When your term life insurance policy has “expired”, many companies will let you convert the policy you have into a whole life insurance policy without having to do the application process all over again or take another medical exam. This option is often offered through what is called a Guaranteed Insurability Rider.
The best time to convert from term to whole life insurance is when your term life insurance policy is about to expire, and you are currently in your 50s or 60s. At this point, you will not be able to take out a longer term policy and given the average lifespan, this is the best time to convert to something permanent.
If you want to extend your current life insurance coverage but the annually-renewable term options are no longer available for you or are simply too expensive because of your current age, it is in your best interest to convert to a whole life insurance policy.
Another reason you want to convert to a whole life insurance policy is that you are setting up an estate and are currently concerned about estate taxes. You might be setting up a trust in your will. You might also need a nontaxable investment option. In all of these cases, a whole life insurance conversion may be the best option for you.
Term life insurance is best for people who have finite financial needs that they want to cover. People that fit some of the following criteria might be better off with term life coverage:
Those who have obligations such as alimony or child support can set up term policies to coincide with the length of those responsibilities.
Other people who might not qualify for whole life insurance could benefit from a Term Policy because it will be the only option they have or perhaps the more affordable option.
On that note, people who simply cannot afford a permanent policy at this time can easily take out a much more affordable term life insurance policy and convert it at a time when their financial situation is different.
Below is a list of some of the common term life insurance policy riders that we recommend people purchase, based on their individual needs. While there are certainly more riders available depending on the company and policy you choose, these are generally offered by most life insurance companies, and provide the most value to the policyholder.
Each of these policy riders has their own costs associated with them that are added to the monthly premium you will pay for your term life policy. Some are expensive, while others are cheaper, and some are even offered as complimentary with certain term life policies from certain companies.
As described above, this rider allows you to convert a term life insurance policy into a whole life insurance policy without having to retake a medical examination, which could put you in a lower health class, and cost you more in monthly premiums.
This return of premium policy rider allows policyholders who outlive the term of their life insurance policies to receive all of the premiums they have paid into their policy back at the end of the term.
This is one of the more expensive term life insurance policy riders. In some cases, companies offer it as an individual type of term life policy instead.
The Accidental Death Rider allows your beneficiaries to receive a multiple of your death benefit if you die as a result of an accident (as defined by your policy). This rider is also available on whole life insurance policies.
The waiver of premium rider makes it so that you do not have to pay your life insurance premium in the event that you are unable to return to work full time as a result of injury or sickness. This rider is also offered on whole life insurance policies.
This rider pays out a supplemental income that is proportional to your policy face amount in the event that you are permanently disabled and unable to return to work. This rider is also offered on whole life insurance policies.
This rider allows you to add life insurance for a child from age 15 days to 18-25 years (depending on the company).
The following table shows term life insurance rates for people in the preferred plus health category, with no health issues.
Note that as you get older, certain term options are no longer available. This shows the need for some people who are looking for life insurance coverage that lasts their whole life to look towards permanent life insurance options as they get older.
|Age||Policy Type||$100,000 Male||$100,000 Female||$500,000 Male||$500,000 Female||$1,000,000 Male||$1,000,000 Female|
|25||10 Year Term||$7||$6||$13||$12||$21||$18|
|25||20 Year Term||$9||$8||$19||$16||$33||$27|
|25||30 Year Term||$12||$11||$31||$24||$52||$42|
|35||10 Year Term||$7||$7||$14||$13||$22||$20|
|35||20 Year Term||$9||$8||$22||$19||$39||$33|
|35||30 Year Term||$14||$12||$39||$33||$70||$59|
|45||10 Year Term||$11||$10||$30||$26||$50||$44|
|45||20 Year Term||$17||$14||$52||$41||$95||$75|
|45||30 Year Term||$26||$21||$89||$68||$171||$130|
|55||10 Year Term||$20||$18||$76||$55||$141||$101|
|55||20 Year Term||$36||$27||$133||$97||$255||$181|
|55||30 Year Term||$73||$57||$271||$194||$534||$381|
|65||10 Year Term||$57||$37||$220||$136||$409||$254|
|65||20 Year Term||$108||$72||$457||$298||$865||$556|
|75||10 Year Term||$161||$112||$675||$460||$1,259||$885|
|75||20 Year Term||$280||$215||$1,254||$871||$2,487||$1,659|
Whole life insurance is a form of permanent life insurance. This type of life insurance coverage lasts for your entire life.
Part of the money you pay in your premiums get invested and depending on how well those Investments perform, you accumulate cash value in the policy.
This cash value can be borrowed against on a tax-free basis throughout the life of your policy, which can be a strong financial tool.
There are many types of permanent life insurance, including, but not limited to some of the following:
What separates the various types of permanent life insurance policies apart is how the cash value is accumulated.
Whole life insurance policies have a guaranteed rate of return, which varies based on company and policy. This makes whole life insurance one of the easiest and safest investment tools for people interested in purchasing permanent life insurance because even in bad years for the market, they will still gain the same amount of return (or more if the company pays dividends to its policyholders).
For people with more advanced financial knowledge, who want to have more influence in the way that their policy accumulates cash value, we recommend a different type of permanent policy such as variable or universal life.
Whole life insurance coverage is best for people who:
For example, a whole life insurance policy may work best for someone who has three children and one of them will inherit the family business while the other will receive a house, the third could receive a life insurance policy, so that everyone inherits something in the event of your death.
Below is a list of some of the common whole life insurance policy riders that we recommend people purchase based on their individual needs. While there are certainly more riders available depending on the company and policy you choose, these are generally offered by most life insurance companies, and provide the most value to the policyholder.
Each of these policy riders has their own associated costs that are added to the monthly premium you will pay for your term life policy. Some are expensive, while others are cheaper, and some are even offered as complimentary with certain whole life policies from certain companies.
Additional whole life insurance riders include accidental death and waiver of premium, which were listed above with the term life policy insurance riders.
This policy rider is exclusive to permanent life insurance policies. It allows you to purchase additional term life insurance coverage in order to supplement your existing whole life coverage. This can be an affordable way to add additional life insurance to your policy for a set amount of time without having to apply for a new policy, or drastically increase rates on your existing one.
This rider allows you to add life insurance for a child from age 15 days to 18-25 years (depending on the company).
This policy rider is strictly offered for permanent life insurance policies including whole life. It allows you to use a portion of your death benefit toward long-term care if the need arises in the future.
This rider is highly recommended for whole life insurance because people are living longer than ever, and the cost of assisted living is very high (upwards of $5,000-8,000 per month), which can leave a large financial burden upon a family.
The following table shows whole insurance rates for people in the preferred health category, with no health issues.
|Age||$100,000 Male||$100,000 Female||$500,000 Male||$500,000 Female||$1,000,000 Male||$1,000,000 Female|
Pros and Cons of Whole Life Insurance
When it comes to choosing the best type of life insurance coverage for you and your family, what you choose ultimately depends on a multitude of factors such as health, age, budget, coverage needed, and more.
We know that the options may seem overwhelming, that is why we are here to help!
Give one of our independent life insurance agents a call today to speak with them for free about which policy may be best for you and your family’s needs. Our agents can explain to you all of your coverage options from companies, to policies, to rates, to help you find the best coverage for you and your loved ones.
Call us today, or get started using our online life insurance quote tool to compare life insurance rates instantly!