What’s The Difference Between Term And Whole Life Insurance?

What’s The Difference Between Term And Whole Life Insurance?

Understanding what’s the differences between term and whole life insurance helps you determine the right policy to meet coverage needs and financial goals for your family. When purchasing life insurance, two major policy types dominate the landscape – term and whole life insurance. But what exactly sets them apart?

Under Term life insurance, temporary coverage is provided for a set period, usually 10-30 years. Death benefits are paid out only if you pass away during the term. Whole life insurance provides lifetime coverage as long as you keep paying premiums.

It also provides tax-deferred cash value accumulation that you can access while you’re still alive. However, premiums are much higher for a Whole life than a Term life, and there is no cash value accumulation for a Term life.

This comprehensive guide will explore the correct answers to the question, “What’s the difference between term and whole life insurance?”. Read on to gain clarity on these two common types of life insurance and decide which aligns better with your priorities.

What’s the difference between term and whole life insurance?

The cost is the most significant difference between term and whole life insurance.

Term life provides pure insurance, only paying if you pass on during the length of your Term life insurance. Monthly term life premiums often start under $30 per month for a healthy 30-year-old seeking $500,000 in coverage.

Whole life premiums are drastically higher since you pay for lifelong coverage, cash value reserves, and insurance company guarantees. A 30-year-old may pay $200 or more per month in whole-life premiums for the same $500,000 death benefit compared to $30 for term.

Over your lifetime, you’ll pay 5-10X more for whole life insurance than an equivalent term policy. The accumulated difference could be invested to create substantial retirement savings.

So, if you solely need death benefit protection during your working income-earning years, term life insurance is for you. It’ll provide substantially more coverage for your dollar than a more expensive whole-life plan.

The only reason to accept higher premiums is if you also want lifelong coverage, cash value accumulation, and guaranteed death benefits.

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Term vs. whole life – coverage duration

Term life insurance covers a precise term length, usually 10-30 years, depending on what you want. Protection expires once the term ends, though some policies allow renewal.

Whole life insurance covers your entire lifetime once purchased, provided you continue to pay premiums. It provides lifelong protection rather than expiring, as term policies do.

Clearly, whole life is the better option if you want lifelong coverage. Term may require purchasing additional policies once your term expires if you still need insurance later in life.

With term life insurance, you lock in insurability when young and healthy rather than facing potential declines in health status, making coverage more expensive later on. The trade-off is that you must stay on top of renewing or replacing coverage.

Term vs. whole life – death benefit amount

Death benefits should also be considered when comparing terms and whole life insurance. The death benefit amount is your beneficiaries’ payout if you pass away during the policy term. Both term and whole life are pretty similar in that they pay the designated death benefit to your family or other named beneficiaries upon death.

For term, you’ll pick a specific policy term length and death benefit, like $500,000 for 20 years. This death benefit remains at a certain level rather than decreasing during the term.

With whole life, the death benefit also remains the same throughout the duration of the policy. You choose the desired payout amount when purchasing the policy.

The key difference in death benefit between term and whole life relates to coverage duration rather than benefit size. Term life’s death benefit expires when your chosen term length ends unless renewed. With whole life, the death benefit coverage continues your whole life.

Term vs. whole life – cash value differences

A significant way term and whole life insurance differ is cash value accumulation. Term life insurance does not build cash value. Only the cost of insurance protection is covered by premiums.

A cash value component that a portion of your premiums contributes to every month is included in Whole Life Insurance. This earns interest based on a minimum guaranteed rate or tied to a market index for potential growth.

The cash value provides a savings element you can access in certain ways while living, including:

  • Securing a policy loan using the cash value as collateral 
  • Withdrawing funds up to your cost basis without incurring taxes
  • Using as collateral for a bank loan
  • Transferring to a new policy if you switch insurers

It also pays to your beneficiaries along with the death benefit upon passing. Term life solely provides a death benefit, while cash value accumulation over time is a defining feature of whole life insurance.

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Term vs whole life – policy flexibility

One benefit of term life is the ability to adjust your coverage duration and amount more easily. You can change term lengths, increase or decrease death benefits, and convert to permanent insurance.

Whole life does allow some customization but less flexibility overall. You may be able to adjust death benefits and premiums to some degree. Still, the policy is meant to remain unchanged. Converting to term life is generally not an option.

Term life provides more flexibility to alter coverage and policy details to align with shifting needs and income over your lifetime. So, the policy differs between term life and whole life insurance.

Term vs. whole life – health eligibility

To qualify for the lowest premiums on individual life insurance, you must meet the insurer’s health criteria regarding:

  • Age – Premiums rise as you age, especially over 50.
  • Tobacco Use – Smokers pay significantly higher premiums.
  • Medical History – Conditions like diabetes or heart disease increase premium costs.
  • Family History – Increased risk factors like cancer or heart disease lead to higher rates.
  • Risk Factors – Dangerous hobbies, careers, driving history, and lifestyle

Typically, term life insurance features lower health eligibility barriers than whole life. You may qualify for term policies with health conditions or age ranges that make your whole life insurance unaffordable.

Which is better, between term life and whole life insurance?

Now that we’ve explored the key differences, which type of life insurance better aligns with your coverage needs, budget, and financial goals.

Term life insurance tends to make more sense if your priorities are:

  • Maximizing death benefit protection per premium dollar
  • Covering temporary needs like mortgages, child expenses, and debt
  • Unable to afford whole life’s high premiums
  • Only require coverage for income-earning years

Whole life is likely the better choice if you: 

  • Want lifelong death benefit coverage
  • Desire cash value savings and growth potential
  • Want assured premiums and death benefits
  • Can afford higher ongoing premiums
  • Need coverage into retirement years

Many opt for a combined approach:

  • Purchase term life for essential income protection through working years
  • Add a smaller permanent policy for lifelong coverage, cash accumulation, and estate planning

It’s best you speak with an independent insurance agent who will then analyze your financial situation professionally and help determine which approach works optimally.

What's The Difference Between Term And Whole Life Insurance - comparewise

How term life insurance works

With term life insurance, you pay a monthly or annual premium for a pre-set coverage period, typically 10 to 30 years. The death benefit only pays out if you die during that term, but coverage ends unless renewed if you’re still alive when the term expires.

Term policies provide pure insurance with no cash value building inside the policy. Because the insurer only pays if you die during the term, premiums are extremely affordable relative to the death benefit. Term life gives you the biggest bang for your buck if you need substantial death benefit protection.

Term life serves a specific purpose—providing financial security for your dependents if you die prematurely during your working years. The death benefit can replace income to maintain the family’s standard of living, pay off a mortgage, fund college, and cover other financial obligations your family would face.

Forms of term life insurance policies

Term life insurance comes in several forms, which are listed below:

  • Level Term: Premiums and death benefits remain steady for the entire term length. This is the most popular type.
  • Renewable Term: You can extend coverage in increments without providing additional health evidence as long as you pay increasing premiums.
  • Convertible Term: This lets you convert the policy to permanent insurance like whole life without undergoing a medical exam.
  • Decreasing Term: Offers a high initial death benefit that decreases over the term as your need for high coverage reduces over time.

How whole life insurance works

Whole life insurance caters to your lifelong insurance coverage as long as you consistently make premium payments. The death benefit pays to your beneficiary whenever you pass away, even if it’s 50+ years into the policy at age 95.

Unlike term, whole life accumulates cash value. A portion of your premiums go toward cash value that earns interest. This provides both death benefit coverage and tax-advantaged savings while living through loans and withdrawals.

The cash value serves multiple purposes:

  • It reduces the insurance costs over your lifetime compared to term since the insurer holds some reserves. After a point, your cash value covers a portion of the death benefit rather than premiums.
  • You can borrow against the cash value and make withdrawals for the same cash value. Loans are income tax-free, while withdrawals above your cost basis incur taxes.
  • If you stop making premium payments, the cash value keeps the policy active for some time.
  • The cash value amount of the death benefit is paid to your beneficiaries along with the death benefit when you pass away.

Premiums from Whole Life Insurance are guaranteed, and they remain unchanged. Death benefits, like term insurance, remain level rather than decrease over time. However, the high lifelong premiums make whole life much more expensive than term life to secure those guarantees.

Types of whole life insurance

Below are the four available categories of whole life insurance:

  • Traditional Whole Life: Offers set premiums, death benefits, and minimum guaranteed cash value growth at a fixed interest rate.
  • Indexed Universal Life: Cash value accumulates based on stock market performance, often the S&P 500. This provides a more significant upside.
  • Variable Life: You choose higher-risk investments whose cash value is tied to. Returns directly correlate to your investment results.
  • Universal Life: Provides flexibility to adjust coverage and vary premium payments based on needs and affordability over your lifetime.

What are riders and how do they work?

Riders provide optional add-ons to life insurance policies that allow customizing coverage. Specific riders cost extra, while some come standard. Riders either enhance the base death benefit, confer other policy benefits, or provide added non-death services.

Below is a list of  term and whole life insurance riders you can consider:

  • Accelerated Death Benefit: If you happen to be diagnosed with a terminal illness, then this will allow early payout of the death benefit.
  • Waiver of Premium: If you become disabled and can’t work, this waives your premium payments.
  • Accidental Death: Additional payout is provided if death results from an accident.
  • Critical Illness: If you’re diagnosed with a major illness, it pays out some portions of death benefits.
  • Long-term Care: Covers potential long-term care costs using the proceeds from the death benefit.
  • Children’s term rider: Adds inexpensive term coverage for children you can convert later.

Riders allow customizing and enhancing policies beyond just the death benefit. Carefully review available riders from insurers to optimize coverage.

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Which type of life insurance is taxable?

Life insurance might have some tax implications that depend on whether you own the policy or the beneficiary. Policy owners get premium payments that are not tax deductible. For permanent insurance, cash value growth is tax-deferred. The death benefit payout income is paid to beneficiaries without them having to pay any tax.

Some key taxation points on withdrawals and cash value during your lifetime include:

  • Loans: Not taxed as income since it’s borrowing your own money
  • Withdrawals on a cost basis: Also not taxable income
  • Withdrawals above cost basis: Taxed as ordinary income

Please consult a tax professional to understand the personal implications of accessing cash value, given it can impact the taxation of social security benefits.

In summary, life insurance death benefits are received tax-free, while the taxation of cash value options varies.

How much life insurance do you need?

Determining adequate life insurance coverage in Canada requires adding up all the expenses and debts your family would be burdened with if you passed away.

These obligations the death benefit helps fund include:

  • Paying off mortgage, car loans, student loans, and credit cards
  • Funding college savings for kids 
  • Replacing income over 10-20 years
  • Covering final expenses like funeral costs
  • Supporting child care costs while spouse returns to the workforce

As a rule of thumb, buy 10-12x your gross annual income in coverage. Getting a personalized recommendation from an independent insurance agent is the best to accurately calculate needs based on your unique financial situation.

Which life insurance companies are the best?

Your life insurance company’s financial strength and reputation are crucial, given that they back obligations decades into the future. Below are some highly recommended life insurance companies:

Compare quotes across several highly-rated insurers. An independent insurance agent can provide personalized recommendations on the best companies for your situation.

Conclusion

Knowing the difference between term and whole life insurance and choosing between them involves weighing factors like the duration of needed coverage, premium costs, cash value goals, and flexibility preferences.

While term life provides pure protection at a lower price, whole life secures lifelong coverage and savings. Comparing policy details across insurers ensures you find the right plan.

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FAQs about what's the difference between term and whole life insurance

What’s the difference between term and whole life insurance?

The main differences are that term life provides temporary coverage, no cash value, and lower premiums. In contrast, Whole Life offers lifelong coverage, cash savings, and higher premium costs.

How expensive is whole life compared to term insurance?

Whole life premiums are around 5-10 times higher than term life premiums for equivalent death benefit amounts, given the added cash value reserves and lifelong coverage.

How do life insurance riders work?

Riders provide optional add-ons to policies for additional benefits like accelerated death payouts for terminal illness, premium waivers if disabled, extra payouts for accidental death, and more.

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December 3, 2023
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