Whole vs. Term Life Insurance

Whole vs. Term Life Insurance

You know you need insurance, but which kind do you choose?

Knowing the key differences between whole vs. term life insurance can help you decide.


If your insurance agent hasn’t talked to you about life insurance yet, they should have!

Having a life insurance policy is one of the best ways to provide for your dependents after you’re gone, yet a surprising amount of people don’t have this vital level of protection.

If you’ve looked into life insurance recently, you may have been a bit overwhelmed. “Whole life insurance? Term life insurance? What do these terms even mean?!”

We get it: life insurance can be confusing. But that’s why we’re here! Let’s take a closer look at each type of life insurance to better understand the differences between them.


What is Term Life Insurance?

Life insurance is a type of insurance policy that pays out upon the insured’s death. Term life insurance only pays out if the insured passes away during a certain time frame (that is, the term).

When you purchase a term insurance policy, you get to choose the length of the term, usually 10, 20, or 30 years. If the term expires without being used, you have the choice to apply to renew your policy, convert it to a whole or universal life policy (more on that later), or simply let your coverage cease.

family hugging in kitchen

Term policies are the most affordable type of life insurance, with premiums being calculated based on the payout amount as well as your life expectancy. For this reason, many life insurance companies will gather in-depth personal information (smoking habits, driving record, family history, etc.) or even require you to undergo a medical exam before you can purchase coverage.

If you pass away while the policy is still active, your beneficiaries will receive a death benefit which they can use to pay your outstanding debt, funeral and burial costs, and any other living expenses affected by your demise. Beneficiaries can use life insurance funds to go back to school, secure housing, and cover numerous other critical expenses.


What is Whole Life Insurance?

Whole life insurance, on the other hand, provides coverage for the remainder of your life. Universal life insurance is a more modern version of whole life insurance.

Because coverage lasts so much longer, whole life policies have much higher premiums (up to 10 times more) than term policies. But this higher cost comes with an added benefit: a policy with a cash value.
Every time you pay your premium on a whole life policy, the insurance company puts part of it into an interest-bearing account. This becomes the cash value of your policy. The more payments you make, the higher the cash value.

What does this mean for you?

You can either take out policy loans (which can come with associated fees) or cancel your policy and collect the current value in cash.

Some policies also earn dividends, which are a portion of the insurance company’s profits that get paid out to policyholders. If you purchase a whole life insurance policy that pays dividends, you have a choice as to how to use those dividends.

You can either receive dividends annually as cash, leave them alone and let them build interest, or use them to reinvest in your policy (by using them to pay premiums or buy more coverage).


Father holding young baby

What About Universal Life Insurance?

Both whole and universal life insurance are permanent life insurance policies that have a cash value, but they are not the same thing.

Universal life insurance is also called adjustable life insurance, as it offers more flexibility with regard to your premium and payout amount.

Universal life insurance premiums consist of two parts: the cost of insurance (i.e. the amount required to keep your policy active) and the cash value (the portion that goes into the interest-bearing savings account).
With a whole life policy, your premium amounts are set in stone and cannot be changed. With a universal policy, however, as long as you cover the cost of insurance, you can choose how much you want to put aside for the cash value.

Universal policies also allow you to change your payout amount if your needs change. If you want more coverage, you can increase it; if you want to reduce your premiums, you can lower your payout amount.


Whole vs. Term Life Insurance: Deciding What’s Best

So how do you decide between term vs. whole life insurance?

When looking at whole vs. term life insurance, the biggest difference is the length of the term.

If you only need to provide for your beneficiaries while your children are young, for example, you can select a term policy to protect them during those years. If you’d rather have protection for the duration of your life to help with estate planning, inheritance taxes, and other expenses, a whole insurance policy would be best.
Whole policies do cost significantly more than term policies, but you can get some of this money back in the form of dividends or borrow against the cash value of the policy if you need it.

And if you cancel the policy, you will receive your cash value as a lump sum. If you cancel a term policy, you don’t collect anything.

However, even if finances are a consideration, the cost of premiums should never be your primary concern.
When it comes to insurance policies, you get what you pay for and life insurance is designed to compensate for the loss of your contribution to the family—whether that’s your earning potential or the role you play as a homemaker.

Before you make a decision about which type of life insurance to purchase, ask yourself:

  • When you need coverage and
  • How much coverage you need.

The answers will help you and your insurance agent land on a policy that best protects you.

Looking for life insurance? Give us a call! As an independent insurance agency, we have the freedom to connect you with life insurance policies from multiple companies to find the option that works best for you.

About the Author

Jason received a Masters of Science & Management in Risk Management & Insurance from Florida State University. He has been with Harry Levine Insurance for 9 years and handles the leadership of daily operations. He was the 2013-2014 Florida Association of Insurance Agents Young Agent Council's Agent of the Year. Currently serves on FAIA Board of Directors.

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