How to choose between term vs whole life insurance

Having a life insurance plan is critical to provide your family peace of mind and a financial safety net. But it can be confusing choosing between the two types, term vs whole life insurance. How do you know which is best for you?

Term life insurance offers protection for your loved ones for a specified period of time and often supplements a permanent plan. Whole life insurance policies (also called permanent policies) do not expire — they are intended to provide protection for your entire life. Some types of permanent life insurance policies accumulate cash value.

Each plan type may have pros and cons depending on your needs. Read on to find out which may be right for you.

How does term life insurance work?

With this option, your insurance premiums last for as long as the term you select — this can be for as little as one year and up to 30 years. Most insurance companies offer policies in increments of 5 or 10 years, so you can get coverage for 5, 10, 20 or 30 years, for example. Once the term runs out, you’ll have the option to continue coverage, but at a higher premium. Term policies pay death benefits to your beneficiaries if you die during the period covered by the policy.

Sometimes, it is possible to convert a term life policy into a whole life policy, but it depends on the insurance provider and their terms and conditions. Ask your advisor when considering options for life insurance.

How much does term life insurance cost?

Term life insurance is often the most affordable, because the rate of your premium is locked in for the term you select. Payments are made monthly or yearly. The amount of your premium varies according to your health and other factors. Term life insurance premiums will be lower than premiums for most whole life insurance policies, which last a lifetime and build cash value.

What is whole life insurance?

As the name implies, whole life insurance covers you for your whole life, provided you continue to pay your premiums. Whole life insurance typically comes with guaranteed level premiums — the amount will never change as long as premiums are paid.

Whole life insurance policies pay death benefits (proceeds after death) and they may also build cash value.

What does “cash value” mean?

Cash value is the additional money you can contribute (above the cost of the insurance plan) that can grow tax-deferred as an investment. Contributions to a cash value option allow you to build a reserve that you may have access to through loan and withdrawal options.

See Also: Does Term Life have Cash Value? – Find out everything you need to know

How much does whole life insurance cost?

The amount you pay will depend on how much coverage you want. Also factored into the cost are your age, gender and health, among other considerations.

How to choose between term vs whole life insurance

So, should I buy term or whole life insurance?

Generally, you should consider a term life insurance policy to:

  • Get valuable coverage at competitive rates
  • Help cover specific financial responsibilities like a mortgage or college expenses
  • Supplement a permanent policy or policy through your employer

Consider a whole life insurance policy if you want:

  • Portable protection for life
  • Level premiums that stay the same each year
  • To contribute additional money above the cost of insurance into the policy on a tax-deferred basis
  • Cash value you can use during your lifetime

Choose term life if you:

  • Only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage.
  • Want the most affordable coverage.
  • Think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.
  • Think you can invest your money better. Buying a cheaper term life policy lets you invest what you would have paid for a whole life policy.

Choose whole life if you:

  • Want to provide money for your heirs to pay inheritance or estate taxes. In 2021, estates worth more than $11.7 million per individual or $23.4 million per couple are subject to federal estate taxes. State inheritance and estate taxes vary.
  • Have a lifelong dependent, such as a child with disabilities. Life insurance can fund a  trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.
  • Want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.
  • Want to equalize inheritances. If you plan to leave a business or property to one child, whole life insurance could compensate your other children.

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What is the difference between term and whole life insurance?

Term life insurance is temporary, covering you for a fixed period of time, while whole life lasts a lifetime. Term life is sometimes called “pure life insurance” because it has no additional value; if you don’t die during the term, your coverage ends and no one receives any money. Whole life insurance includes a cash value account that slowly grows like a savings account.

How much does life insurance cost?

The average cost of life insurance is $26 a month. This is based on data provided by Quotacy for a 40-year-old buying a 20-year term life policy, which is the most common term length sold. Younger and healthier buyers will usually pay less than older buyers or people with medical issues.

Is whole life insurance or term life insurance cheaper?

Term life insurance is cheaper than whole life insurance. With a term policy, all you’re buying is life insurance for a fixed period of time (often 10, 20 or 30 years). With a whole life policy, you’re also paying for a growing savings account that can be drawn on later in life.

Can I convert a term life policy to a whole life policy?

Not all term policies can be converted to whole life policies. Check with your life insurance provider to see if your policy has an optional or built-in conversion rider, which would allow you to switch over to a permanent policy.

What companies offer the best term life insurance?

The best life insurance companies have a history of financial strength and customer satisfaction. To read more about the available options and compare insurers, see our list of the best life insurance companies for 2021.

Who should buy whole life insurance?

Whole life insurance can be a good option for people who want to leave behind an inheritance no matter when they die, who have reasons to take advantage of the tax-advantaged cash value accounts or who need to provide lifelong care for a dependent. Whole life costs more than term life, so people who need temporary coverage or who can earn more by investing the difference on their own should turn to term.

Do I need life insurance with a cash value account?

Cash value accounts can help you manage your income during your retirement and can offer a convenient way to save while paying for life insurance. Cash value life insurance is rarely the best available investment option, though, so anyone considering a permanent life insurance policy for the cash value account should talk to an independent financial advisor first.

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