Term Life Insurance vs Whole Life Insurance: Which One is For You?

The first thing people catch on to when researching life insurance policies is the contrast between term life insurance vs whole life insurance. So, let’s clarify: term life insurance provides life coverage for a specified time, usually from one to 30 years. On the other hand, whole life insurance is the most popular type of permanent policy, meaning it offers lifelong coverage. 

So, the first crucial difference between term and whole life is the coverage period – limited or lifetime coverage. The second discrepancy is whether it builds cash value or doesn’t. A whole life policy has a cash value component which provides growth at a fixed interest rate like a fixed annuity or a certificate of deposit. Opposite, term life doesn’t have a cash value component.

If you are at the beginning of exploring life insurance options or have some doubts, this article will help you better understand the basics of these two main policies. In today’s article, we will talk about:

  • What is term life insurance?
  • How does term life policy work?
  • Pros and cons of term insurance.
  • What is whole life insurance?
  • How does the whole life policy work?
  • Advantages and disadvantages of permanent life insurance.
  • Term vs. whole life: key differences & and which one you should choose
  • The Infinite Banking Concept.

Keep reading this article to find answers!

Term Life Insurance: An Overview

One of the main reasons why some people prefer term life insurance over other policies is because it’s the most affordable. Besides that, term life insurance is flexible in choosing the coverage period, and you can customize the term life length from one to 30 years, but typically set for 10, 15, 20, and 30 years.

Term insurance is sometimes called ”pure life insurance” because there is no option for building cash value like it is in whole life insurance. 

Instead, the term life policy is designed ”purely” to payout death benefits to beneficiaries if the policyholder dies during the term. If the insured person outlives the policy, they can either renew it for another term or cancel it. 

Depending on your insurance company and its conditions, it is sometimes possible to convert a term life insurance policy into a permanent one.

How Does it Work?

Annual costs of term life insurance stay the same for the level term period. However, if the policyholder renews it after the fixed period ends, the rates will be higher each year. If they didn’t pass away during the time of coverage, and don’t want to renew it, then the policy expires.

The policyholder could have premiums paid into the policy only if they bought a return of premium term life insurance policy. In other cases, there aren’t paid premiums.

Most people decide to buy life insurance for income replacement or to cover specific debts (mortgage payments or other). Another common reason for choosing this life insurance is to cover the years the kids go through college.

Term life insurance offers an accidental death benefit meaning they will provide an additional death benefit if the insured person dies in an accident. Life insurance companies usually charge extra for this.

Probably the safest option for a term life policy is to find one that is possible to convert into a permanent life policy (whole or universal life). 

Often people realize that permanent coverage is more beneficial for them than temporary. Another reason is that this is usually cheaper than buying a new policy. Especially can be helpful if someone’s health conditions are now worse than when they first got the policy.

extended term life insurance

Image Source

Pros and Cons of Term Life Insurance Policies

After understanding what term insurance is and how it works, it’s time to highlight its pros and cons.

Pros

  • Tax-free death benefit

The beneficiary or beneficiaries will get a lump sum from the life insurance company if the policyholder has died during the term. Luckily, term death benefits are tax-free, meaning they will keep the total amount and use it however they need or wish.

  • Straightforward to understand and use

There is no need for the assistance of a financial advisor unless you want to (but in most cases, it’s unnecessary). It’s easier to understand the terms because term life insurance doesn’t combine interest and savings with insurance coverage.

  • Cheaper

Most people overestimate how much term life insurance costs and usually mistake guessing with three times more than it is. It is affordable coverage, but please don’t decide based on price. When choosing a life policy, the most important thing is to weigh what you get for the money you will pay. It will be useless to pay, even a tiny amount, and have no benefit in return.

  • Flexibility with payment and options

A policyholder can choose if they want to pay their life insurance premiums monthly, quarterly, semi-annually, or annually. Term life insurance involves many different policies, so there are many options to choose from.

  • No medical exam in some cases

While applying for whole life always requires a medical exam, it is not the case with term life insurance.

  • No penalty fees 

You won’t be charged any penalty fees if you cancel the policy.

Cons

  • No cash value

Term life insurance policies don’t involve a savings account like whole life policies. It means you won’t be able to borrow money from your policy and start your banking process.

  • Limited coverage

The experience has shown that permanent insurance is more suitable for most people than temporary coverage. Often people have permanent needs (like taking care of a child with special needs) or want to cover funeral expenses.

These two differences are the key when comparing both whole and term life somewhat a term vs. permanent life insurance.

  • The maximum age limit

Even though the maximum age limit depends on the insurance company and term length, it’s usually the limit of 50 years old for all term lengths. People 60 to 70 years old are limited to a 20-year term policy. People from 70 to 75 years old have a limit for a 15-year term policy. And for people over 75, the maximum policy length is ten years.

Whole Life Insurance: An Overview

Whole life insurance is permanent life insurance, meaning the insured person is covered as long as life insurance premiums are paid on time. It’s a type of cash value life insurance that includes a cash value option.

In this article, we decided to talk about whole life instead of permanent life because we think it’s the best option for them. 

Also, the Insurance Information Institute says that whole life insurance is the most common and purchased type of permanent life insurance. Other types of permanent policies are variable life insurance and indexed universal life insurance.

The second vital feature, besides lifelong coverage, is the savings component called cash value. After every premium, a portion of it goes toward cash value, which continues to grow over time on a tax-deferred basis. It means that you won’t be paying any taxes on the gains. A fantastic advantage of whole life over other permanent policies is that it’s the most convenient and straightforward.

whole life insurance policy

Image Source

How Does it Work?

Buying life insurance, especially whole life policies is highly unique and personal. The policy is based on the mortality risk, medical history, desired coverage level, and optional features it offers (such as a cost-of-living adjustment rider).

When people apply for whole life insurance, they undergo an underwriting process in which they may have to go through a medical exam. After that, based on their life expectancy, the insurer’s actuaries set guaranteed values:

  • A guaranteed death benefit: The amount that will be paid to your beneficiaries is secured and never decreases.
  • A guaranteed cash value: grows at a set rate annually until it is equal to the face amount of the policy at a specified age (usually age 100 or 121).
  • A guaranteed level premium: this never changes throughout the policy. The policy will stay in effect if the policyholder pays premiums.
  • A guaranteed endowment: If the insured person is still living at the age set in the contract, the death benefit is guaranteed to be paid. It’s usually age 100 or 121.

As you see, the whole life policy is more than just life insurance coverage. A policy’s cash value provides numerous benefits during your entire life. It allows you to borrow money against your policy’s cash value and use it to pay whole life premiums or to surrender it for cash in retirement.

Dividends

You will have to make a fateful decision if you want to purchase a whole life insurance policy. That decision is choosing the right company. Maybe it sounds trivial, but it can make a big difference. The cash value portion will earn annual dividends if you buy a whole life insurance policy from mutual insurance companies. 

Thus, the insurer will pay dividends to the policyholders. Dividends increase your cash value beyond the guaranteed rate. Therefore, make sure to find mutual insurance companies because we want to make the most of our whole life insurance policies.

Pros and Cons of Whole Life Insurance

Firstly, let’s see the benefits of whole life insurance.

Pros

  • A permanent estate

Since the whole life insurance policies provide a guaranteed death benefit for the policyholder’s entire life, the total amount is set aside for your family when your first premium is paid.

  • Withdrawals

Withdrawals that policyholders can access during their entire life are considered a tax-free return of cost basis.

  • The death benefit is tax-free

The death benefit is not subject to federal income taxes.

  • Tax-favorable loans

Loans that policyholders can take against their whole life policy are not considered to be taxable events. This remains the same even though the policy may significantly gain over life premiums.

  • Liability protection

Most states are protecting the benefits of life insurance from the claims of creditors.

  • Disability protection

Even if the insured person becomes disabled, whole life insurance can continue to be funded. 

  • Distribution

When the whole life is executed correctly, it helps avoid probate and provides beneficiaries more privacy than it would be by a will. While the will becomes public when it’s probated, the death benefit distributions are commonly private, contractually driven transactions. 

  • Paying off loans with dividends earning

That’s so crucial to buy your whole life from a mutual company. You can use annual dividends to pay back the policy loan.

  • Infinite Banking Concept

We will explain in detail what it is and how to use it a bit later. For now, it’s enough to say that thanks to the whole life policy, you can start your personal banking process and stop depending on traditional banks.

Cons

  • More expensive

Compared to term life insurance, monthly whole life costs are between five and 15 times as costly, according to Investopedia’s estimate. We know it might sound too expensive, but the picture isn’t just black and white. 

One of the key reasons for this cost is the cash value account. Thus, you are not wasting money. You just pay more for another option with your life insurance policy – an investment vehicle. 

Also, the monthly costs depend on many factors like how old the policyholder is and their health condition. If the person is young-ish and healthy, the prices are almost the same as with the term life policy. That’s why finding and buying the right life insurance policy as early as possible is vital. 

  • More complex

Many people are a little confused about the functioning of whole life insurance due to an investment component. It’s indeed more complicated than term life insurance, but because it has few dimensions in the structure. 

However, whether you will hire a life insurance agent depends only on your knowledge and will to learn and research. You can certainly do it independently if you are excited to learn and explore. 

On the other hand, if you don’t want to take a participation in it and some extra cash, there is nothing wrong with seeking help from a professional. The point is that even if it’s more complicated than term life insurance, you can still figure the ins and outs on your own.

  • No option to convert

As you saw, with some term life insurance policies, it’s possible to convert them into a permanent life insurance policy if it will be more suitable for you. Unfortunately, there is no option to change your permanent life insurance into term life insurance. However, there is always a solution to get your term life simultaneously with your whole life. 

Term Life Insurance vs Whole Life Insurance: The Ultimate Comparison

Term vs. Whole Life Insurance: Length of Coverage

With term life, you choose a length from one to 30 years, usually 10, 15, 20, and 30, depending on your needs. Whole life insurance lasts as long as you pay your premium. Thus, it can be for a lifetime.

Term vs. Whole Life Insurance: Premiums

Term life is often less expensive in comparison to whole life. However, whole life offers some features and possibilities that term life does not.

Term vs. Whole Life: Cash Value

A term life insurance doesn’t build a cash value, while a whole life coverage offers a cash value policy where you can make tax-deferred cash value.

Term vs. Whole Life Insurance: Guaranteed Payout

With term life, a payout is guaranteed for the period your term is active as long as premium payments are made. Still, with the whole life, a payout is guaranteed for the policy’s life as long as premiums are paid.

term vs whole life insurance

Image Source

Which One Should You Choose?

It should be easier to answer this question after reading this article and weighing the pros and cons of both life insurance types. However, the decision still might be difficult, especially because everyone has to deal with different problems. But, we made a list of cases when you should buy term life and whole life.

Choose Term Life if:

  • You want to cover the years of a mortgage or other outstanding loans
  • You want to cover the years during which your children will go through college
  • You are a business owner and have to repay your debts, outstanding taxes, or other expenses for your business.

Buy Whole Life if:

  • You want to build wealth and leave money for your heirs
  • You want to cover your funeral costs
  • You have a lifelong dependent
  • You want life insurance that builds guaranteed cash value.

Pro Tips

  • Please don’t choose term life just because of its affordability, if you think whole life would be better for you. There are always ways to make extra cash and cover the price difference. The whole life is more expensive initially, but it will return to you later.
  • Don’t be afraid to use life insurance as an investment vehicle. We know many people have an aversion when they hear ‘investing’ because they immediately think about the stock exchange and the risks of losing their hard-earned money. It’s not the case with using whole life insurance policies to invest. It is one of the safest ways to invest and earn money!

Infinite Banking Concept

One of the key reasons why we prefer whole life insurance over other life insurance alternatives is the Infinite Banking Concept or over-funded life insurance. The Infinite Banking Concept is a popular way to earn money. 

By using the Infinite Banking Concept, individuals can get a better return on their investment while also building wealth and creating a better future. The Infinite Banking Concept is easy to use and effectively builds wealth, making it an excellent choice for those who want to create a bright future for themselves and their families. 

Thanks to the Infinite Banking Concept, more people can achieve their financial goals and build a solid foundation for their future.

We encourage you to dig deeper into this topic and discover how to own your lifestyle!

The Infinite Banking Concept

Image Source

Final Thoughts

Our goal was to help you understand the differences between two central policies that offer life insurance coverage: term and whole life. Both of them provide financial protection and can be beneficial in different situations. However, which one will be more suitable for an individual depends on their current financial situation and goals and plans for the future.

We argue that whole life insurance is the better and more beneficial option for the majority of people. Whole life insurance provides lifelong coverage, which is more favorable to the policyholders and their beneficiaries. 

But it’s not just a life insurance plan. It also supports a cash value account that grows at a fixed interest rate like a fixed annuity or a certificate of deposit. And the crucial reason why we always suggest whole life insurance is the opportunity to start your Infinite Banking Process and stop relying on traditional banks.

If you want to build wealth, provide coverage for yourself and your loved ones, become financially independent, and much more, watch our free masterclass! You will learn how to achieve your financial goals in just one hour.

Wealth Nation Masterclass