Choosing Between Term or Whole Life Insurance
Understand the differences between term and whole life insurance to select the best policy for you.
The Top Line
- Term insurance and whole life insurance are the two most common options for life insurance. People buy life insurance to provide for their families in the event that they die.
- Term and whole life refer to the length of time that you will have the insurance.
- What is right for one person may not necessarily be right for the other. It depends on your individual needs and expectations.
- There are pros and cons to both term insurance and whole life insurance. It’s important that you are familiar with them before making your decision.
Life insurance is a recommended insurance policy for anyone who has dependents that they need to be able to support, even if they pass away. However, one of the greatest debates rages within the finance community when it comes to term or whole life insurance. Term and whole life insurance each have their benefits, so how do you know which one to choose?
In this complete guide to choosing between term or whole life insurance, we’ll walk you through the benefits and drawbacks of each type of insurance and give you the information that you need to make an informed decision on term or whole life insurance. By the end, you will have a better idea of which one is better for you.
Does One Size Fit All?
The great thing about having the option between term and whole life insurance is that life insurance is rarely a one-size-fits-all solution. Term insurance will be better for some people, while whole life will work better for others. It all depends on your individual risk tolerance, budget, and other life factors that will play into the decision.
Term Life Insurance
A term life insurance policy is the most common type of life insurance policy. Term life insurance policies are policies that you hold for a specified length of time that is determined at the outset of the policy. This usually ranges anywhere from 10 to 30 years. If the holder passes away within that time frame, the life insurance policy pays out a specified amount in benefits.
Pros
There are many good things about term life insurance policies that people love and make them the preferred life insurance policy. The first is that term life insurance is usually less expensive for the same amount of coverage as a whole life insurance policy. This is because the insurer only covers you for a set amount of time, or a term.
The second is that term life insurance is more flexible. Let’s say you only want life insurance for the next 10 years. With a term life insurance policy, you can make that happen easily. There are many options for term life insurance policies to choose from ranging from short-term options to long-term policies. This means that you can become insured for your desired time frame without getting locked into a lifelong contract.
Another benefit of a term life insurance policy is that with many companies, you can transition them to a whole life policy. So, if your term life insurance policy is coming close to expiration, you can always switch to a whole life insurance policy. Term life insurance policies give you the most flexibility.
Cons
There are also some downsides to term life insurance policies. The main one being that if the life insurance policy never pays out and it expires, you will have invested hundreds or thousands of dollars with nothing to show for it. These policies don't build value, add to the payout, or have any cash value whatsoever that you can tap into later on. For this reason, they are thought of as a riskier investment.
Whole Life Insurance
A whole life insurance policy is similar to a term life insurance policy in that it provides payment benefits for policyholders that pass away. However, the term of this policy is in perpetuity. Instead of it expiring after a set period of time, a whole life insurance policy will be valid until the death of the policyholder. Many people take comfort in knowing that regardless of how long they hold the policy, they will be eligible for benefits for life.
Pros
There are plenty of benefits associated with whole life insurance policies. The main benefit that people cite is the fact that whole life insurance policies have the potential to build value over time. As you pay into the whole life insurance policy, the cash payout can increase as well as the ability to draw from those funds later on in life. This means that the money paid into the policy is not lost forever and does not represent a bad investment should it never be used to pay out a death benefit.
Cons
The largest downside is that whole life insurance policies are more expensive than term life insurance policies. Some financial advisers point out that you could use the savings from a term life policy and invest it with larger gains than you would receive with a whole life policy.
Another downside to a whole life insurance policy is that it is not as flexible. You don’t get to choose your term and you are agreeing to a lifelong insurance policy. Many of these policies are not very flexible on how much you can withdraw and for what purpose, as well. So, while you can withdraw funds from these policies, you might be very restricted in what you can withdraw for in terms of a purpose.
Which is Best?
One of the most long-lasting debates in the personal finance community is whether it is better to get term life insurance or whole life insurance. These are the two most common types of life insurance and there are people from both types of insurance that advocate for them. However, the real truth is that term life insurance is better for some while whole life insurance is better for others. Which one is better for you will depend on what situation you are in, your age, your health, and a myriad of other factors. There is no clear-cut winner when it comes to a blanket rule for all policyholders.
Can You Convert a Term Life Insurance Policy to a Whole Life Insurance Policy?
One of the greatest benefits of a term life insurance policy is that many have the ability to convert to a whole life insurance policy. This gives you the flexibility that you may want. If you want to be insured but don't want to commit to a whole life insurance policy just yet, then you might want to start out with a term life insurance policy with the possibility of switching to a whole life insurance policy later on. This gives you a bit more flexibility.
Can You Have Both?
Many people wonder if it is possible to have both a term and a whole life insurance policy. The answer is that you can absolutely have both, and many people do use both. If you already have a whole life insurance policy but want some added protection in the next 10 years, for instance, you could purchase a term life insurance policy as supplementary coverage.