Term Life Insurance Policy Quotes – The two oldest types of life insurance – term and whole life – remain among the most popular types Whole life is a form of permanent life insurance that lasts your entire life (as long as you pay the policy premium). It also accumulates cash value that you can withdraw or borrow against Why You Live. On the other hand, term insurance lasts only for a fixed number of years (term) and does not pay any cash value.
Apart from whole and term life, many other variations like universal life (UL) have emerged. Today, the best insurance companies offer more complex products to reach a wider range of customers.
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But back to basics, what is the difference between term and whole life and which is better for your needs? These two types of policies are the most popular and easy to understand. We’ll break down the key features that set this insurance’s core apart.
Types Of Life Insurance
Term life insurance is probably the easiest to understand because it is straight insurance without the bells and whistles. The only reason to buy a term policy is because of the promise of a death benefit for your beneficiary if you die while it is in effect.
As the name suggests, this stripped-down form of insurance is good only for a fixed period, be it five years, 20 years or 30 years. After that, the policy simply expires.
Because of these two characteristics—simplicity and limited duration—term policies are also often cheaper, by a large margin. If you only want the ability to protect your family after your death from a life insurance policy, term insurance is best if you can afford it. Because term policies are generally more affordable and can last until your child reaches adulthood, they can be an option for single parents who want an extra safety net.
The average 30-year-old can get a 20-year term policy with a $500,000 death benefit for $27.42 per month. Because of her generally longer life expectancy, the average 30-year-old woman can buy the same policy for just $21.74.
Factors That Affect Your Life Insurance Premium
Of course, various factors will change this price. For example, a larger death benefit or a longer length of coverage will definitely increase the premium. Also, most policies require a medical exam, so any health complications can increase your rate even more than standard.
As term insurance expires, you can spend all that money on nothing but peace of mind. Also, you cannot use your investment in term insurance to build wealth or save tax.
Whole life is a form of permanent life insurance, which differs from term insurance in two main ways. For one, it doesn’t expire as long as you keep making your premium payments. It provides some “cash value” in addition to the death benefit, which can be a source of funds for future needs.
Most whole life policies are “level premium,” meaning you pay the same monthly rate for the duration of the policy. This premium is split in two ways. A portion of your payment goes toward the insurance component, while another portion helps build your cash value, which increases over time.
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Many providers offer a guaranteed interest rate (often 1% to 2% annually), although some companies sell “participating” policies, which pay non-guaranteed dividends that can increase your total return.
Initially, the whole life premium amount is higher than the insurance cost. As you get older, this reverses and the price becomes lower than a typical term policy for someone your age. This is known as “front-loading” your policy.
At a later date, you can borrow or withdraw your cash value amount to pay for expenses like your child’s college tuition or home repairs, which grow on a tax-deferred basis. In that sense, it is a more flexible financial instrument than a term policy. Loans from your policy are tax-free, but you will have to pay income tax on investment gains from any withdrawals.
Unfortunately, death benefits and cash value are not entirely separate properties. If you take out a loan from your policy, your death benefit will be reduced by a corresponding amount if you do not repay it. If you take out a $50,000 loan, for example, your beneficiaries will receive $50,000 less, plus any outstanding interest if the loan is still outstanding.
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The main disadvantage of whole life insurance is that it is more expensive than a term policy – quite a bit. On average, permanent policies cost five to 15 times more than term coverage with the same death benefit. For many consumers, relatively high costs make compliance difficult.
Another potential drawback of whole life insurance is its complexity. With a term policy, for example, you can stop paying if you no longer need or can afford the insurance.
However, depending on your carrier, whole life policyholders may face a surrender charge of up to 10% of the cash value if they decide to withdraw from their policy. Usually, this charge decreases over the years until it finally disappears.
So what type of coverage is best for your family? If term coverage is all you can afford, the answer is simple—primary protection is better than no protection at all.
Life Insurance: Policies, Types And Quotes
For those who can afford significantly higher premiums with a whole life policy, the question is a little tougher. If your goal is to save for retirement, many fee-based (ie, non-commission-earning) financial advisors recommend turning to 401(k)s and Individual Retirement Accounts (IRAs) first. After maximizing these contributions, a cash value policy may be a better option for some people than a fully taxable investment account.
Some consumers have unique financial needs that a whole life policy can help them manage more effectively. For example, parents of children with disabilities may also want to consider whole life insurance, as it covers your entire lifetime. As long as you continue to pay the premium, you know that your children will get the death benefit from your policy.
It can also be a valuable tool in succession planning for small businesses. As part of a buy-sell agreement, business partners sometimes take out whole life insurance for each owner, so that the remaining partners can purchase the deceased’s equity shares in the event of their passing.
Regardless of the type of insurance policy, the premium will be lower (and healthier) the older you are when you buy it.
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This is an age-old question in the life insurance business. The answer is that it depends on your needs and desires. If you only need life insurance for a relatively short period of time (such as to raise your young children), term may be better because the premiums are more affordable. If you need permanent coverage that lasts your entire life, whole life is the choice. Whole life also offers many living benefits derived from cash value savings, which reduce its actual cost over time.
Life insurance companies or their agents earn commissions from selling policies. This is usually 60%-100% of the first year’s premium amount and a series of smaller ongoing residual payments each year (perhaps 2% to 10% of that year’s premium).
Common term life policies come in 10-, 15-, 20-, 25- or 30-year terms. A small number of insurance companies will also offer 35- and 40-year policies.
Whole life insurance certainly offers more financial flexibility with its cash value component. However, since term policies are more complex and expensive, many consumers follow the age-old principle, “buy the term and invest the rest.”
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Authors must use primary sources to support their work. These include white papers, government data, original reports and interviews with industry experts. Where appropriate we also cite original research from other respected publishers. You can learn more about the standards we follow to create accurate, unbiased content in our editorial policy. Life insurance is a contract between the life insurance company and the policy owner. A life insurance policy guarantees that the insurer pays a sum to one or more named beneficiaries when the insured dies in exchange for the premium paid by the policyholder during their lifetime.
Different types of life insurance are available to meet all types of needs and preferences. Depending on one’s short-term or long-term needs for insurance, it is important to consider the main choice of choosing temporary or permanent life insurance.
Term life insurance is designed to last for a specified number of years, then expire. You choose the term while taking the policy. Typical terms are 10, 20 or 30 years. The best term life insurance policy balances affordability with long-term financial strength.
Many term life insurance policies allow you to renew the annual contract once the term expires. This is a way to extend your life insurance coverage but at a renewal rate
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