Is whole life insurance better than term life insurance?

Updated: Aug 6, 2021

True or False: Whole life insurance is better than term life insurance.

It Depends, but we think mostly False:

There are benefits to whole life insurance that you do not get with term life insurance which includes the fact that whole life policies are permanent. This means that for as long as you pay your premiums the plan can never be cancelled, and you will not have to apply for a new policy. However, the cost of whole life policy versus a term life policy can make a big difference. Premiums for a whole life policy can be as much as 10-15x more per month than its equal benefit in term life. For example: a 20-year term life policy with a $500,000 benefit may cost $27 per month while the equivalent whole life policy may cost upwards of $300 per month.

What is the real difference in whole life and term life?

A term life insurance policy is for a set amount of time or a term. These policies are usually in 10-, 20-, 30- year increments. At the end of that term, you will need to renew the policy or find a new policy. Both term life and whole life policy premiums are based on the age at which you applied, your health at the time of applying, and your background check.

A whole life insurance policy remains active for as long as you pay the premiums. You will generally never have to go through the application process again which means you will not have to submit another physical or new blood tests. Premiums are based on the age at which you start the policy so you will not see an increase in premiums throughout the life of the policy. Generally, whole life policies are up to 12 times more expensive than term life policies with the same face value, which is also called the death benefit. For example, at 20-year term policy with a face value of $500,000 may cost $27/month but the equivalent whole life policy may cost up to $300/month.

Why so much more? What is Cash Value?

The reason whole life costs a lot more than term life revolves around what is called cash value and the risk to the insurer. Generally, premiums are charged to cover the risk to the insurance company of having to pay out on a policy, because you do not have to renew your policy with a new physical and a whole life policy could last for well beyond term policy limits the risk is higher thus a higher cost to the company. Beyond the additional risk a cash value accumulates for whole life policies. The excess amount you pay in premiums stores like a savings account in your policy. There are many different variations of whole life, but you can think of a whole life policy as a low interest savings account.

As you pay more premiums your cash value rises. This cash value allows you to borrow money from your policy in some cases but normally this cash value is considered the surrender value. The surrender value is the cash amount you or your beneficiary would be paid to cancel or to surrender your policy.

Why we think term life is a better option?

Term life policies allow you to cover what is important to you in the timeframe that you need it at an affordable price. If you bought life insurance to help cover the mortgage on your house, then when you pay off the mortgage you may not need as much life insurance benefit. The other big issue with whole life policies is around the cash value. Often you will make more in returns on that same excess premium money invested outside of a whole life policy than you would in a whole life policy. There are reasons to have whole life and there are some benefits. Due to its permanent nature, if you get sick later in life you will not have to worry about finding a new policy when the term ends. This can be a big plus.

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