Which Insurance is better and why: term or whole life insurance?

Which Insurance is better and why: term or whole life insurance?

What is life insurance?

A life insurance policy allows your beneficiaries to receive a lump sum from your life insurance provider when you pass away. This is in return for premium payments you make during your life. The purpose of this amount is to provide financial security to your family after your death.Term and whole life insurance policies are better for senior citizens. A life insurance policy allows your beneficiaries to receive a lump.

Life insurance policies have the following three components:

  1. Premium

This is the amount of money you pay for the insurance policy. You can pay it monthly, quarterly, or annually throughout your life. The amount you pay mostly depends on the coverage you want, the type of policy you opt for, and the risk you pose. The risk is associated with the following factors:

  • age
  • driving history
  • health history
  • the area where you live
  • job

 

  1. Death Benefit

This is the amount the insurance company guarantees your beneficiaries receive on your death. You decide the death benefit based on your needs.

 

  1. Cash value

Cash value servers as  savings account that you can withdraw from during your life. You make additional contributions that allow you to build a reserve.

 

What Is Term Life Insurance?

Term life insurance covers you for a certain time period, usually between 20 to 30 years. Most insurance companies offer coverage in increments of 5 or 10 years. Once this time period is over, you can continue with the insurance plan but usually at a higher premium. Term life insurance is often more affordable because it has no cash value until you pass away.

Term Life Pros

Temporary Coverage

Term life insurance is perfect for situations where indefinite insurance isn’t required. In the majority of the cases, the purpose of life insurance is to give a degree of financial protection to the family in case the breadwinner of the family passes away.  This risk usually exits for a limited time.

Let’s take the example of a married couple. The husband earns, and the wife looks after the house and children.  They don’t have cash in reserve, and if the husband passes away, the wife would be left in a financial crisis. If the wife passes away, the husband will need extra money for childcare. This makes them good candidates for term insurance.  A 20 or 30-year term insurance will be good for them; after that time, loss of income and being able to afford childcare won’t matter as the child will have grown up to be self-sufficient, and they will have their retirement savings to depend on.

Simplicity

Term life policies are easy to understand. You pay a certain amount as premium, and your beneficiaries receive a lump sum on your death.

Term Life Cons

Limited Coverage

The greatest con with this type of insurance is determining how long you need it for. It’s impossible to tell what the future holds and may result in a situation where you get insurance for 20 years only to find out you need it for longer.

Escalating Premiums

As you age, the premium costs rise. Even though it doesn’t seem much of a problem when you are young, premium costs eventually escalate out of control. Term life policies tend to be cheaper for healthy people under 50.

No Capital Build-up

Term life does not accumulate capital as the policy owners often outlive the term of the insurance. Many people see the expiration of insurance plan as a waste of money.

Inflexibility

With term life insurance, you cannot change the death benefit or increase premium should you need it.

You have to die to reap the benefits

Even though you are paying small amounts every month, you won’t get the benefits for as long as you live. You have to die for your beneficiaries to receive the benefits.

 

What Is Whole Life Insurance?

Whole life insurance offers you coverage for as long as you live, given you pay the premiums. Compared to term life, the premiums for whole life are more costly. It pays the death benefit and may allow you to build cash value. Even though it allows you to build cash value, you should never forget that this is not an investment, but the purpose of this is to provide financial protection to your family.

Your insurance premiums depend on factors like:

  • Age
  • Gender
  • Health
  • Medical history
  • The amount of risk you pose

Whole life pros

Whole life coverage

The fact that it covers you your entire life is very comforting to many. With term insurance, a lot of companies don’t take you if you are above 65 and not to mention the prices of premiums escalate quickly after some time.

Savings account

Whole life insurance offers a cash value component, savings account along with a death benefit.  What this means is that, from the premium that you pay, you can borrow or cash some of that during your lifetime.

Constant premiums

No matter when you opt for it, the premiums are bound to stay constant during your lifetime.

No additional medical exams

Even if you’re health deteriorates in the future, you will still be covered and won’t have to take further medical exams.

Option to surrender

Should your financial situation get worse, you can surrender the policy and receive the cash value from the insurance company.

Whole life cons

Cost

Though the cost varies based on various factors but you can expect whole life insurance to cost about 10 times more than term life.

Complexity

There are a lot of factors that come into play with this type of insurance, how the dividends are paid out, how the cash value growth is determined. All these factors also vary from company to company. This may make it complex to understand, but with the help of a professional, you can easily choose the right policy for you.

Cash value takes a long time to build out

It can take you somewhere between 10 to 15 years, even more to actually have enough cash to withdraw against your policy.

Which one should I go for?

Now that you know the difference between the two, you are probably left wondering which one is better. Often people opt for one and the switch between the two. Instead of the “which one is better” debate, it is better that you focus on your needs and decide which plan is right for you based on that.

You should consider why you want life insurance in the first place. Do you want to build cash value? Or, do you want to leave behind money for your family?

A term insurance plan will be suitable for you if you have the following in mind:

  • Getting valuable coverage at competitive rates
  • Covering college or mortgage expenses
  • Providing for a loss in income
  • Covering any short term debts
  • Needing additional financial protection when your children are young

 

A whole life insurance plan will be suitable for you if you have the following in mind:

  • Portable protection for life
  • Premiums with a constant cost
  • Cash value you can use during your life
  • If you can’t save money