Whole and Term Life Insurance are the two main types of Life Insurance. Their major difference can be boiled down to cost, length, and features. With either policy, your nominated beneficiaries get a lump sum of money called Death Benefit. Your loved ones can use the death benefit to pay your outstanding debts, funeral expenses, educational expenses of children, or clear mortgage payments.
This article revolves around the major differences between whole and term life insurance. For the sake of making things more understandable, we will discuss both these policies separately.
What is Term Life Insurance?
As the name implies, Term Life Insurance covers you for a limited number of years, which is called a Term. It’s straightforward life insurance that doesn’t come with complex features. You can buy a term life insurance policy for 1 to 30 years. However, the death benefit in term life insurance is not guaranteed because this policy only pays your beneficiaries if you die during the term. As a Term policy remains in force for a fixed number of years, it has lower premiums, making it the most affordable life insurance option.
Ideally, the length of the term life insurance policy you choose depends on the financial obligation you want to cover. For example, if you’re a new single parent, you can buy a 20-year term policy that lasts until your child enters adulthood and is no longer dependent on You.
Pros
- Term Life Insurance is more Cost-Effective than other types of life insurance.
- Simple to understand and buy.
- Best Option if you want temporary coverage.
Cons
- Death Benefit is not guaranteed.
- You can’t use it as a wealth-building or tax-planning strategy.
What is Whole Life Insurance?
Whole Life Insurance is permanent Life Insurance that lasts for the policyholder’s entire life and guarantees the payment of the Death Benefit to the beneficiaries. Its premiums are high, which makes it an expensive type of life insurance. Unlike term life insurance, Whole Life Insurance comes with a Cash Value Component, which is an additional feature to the death benefit. A portion of the premiums you pay goes to build the cash value that you can use to borrow a loan, support your premiums, or make a withdrawal. In your whole life insurance policy, premiums remain the same throughout your life, and cash value grows continuously at a fixed rate.
Pros
- Cash Value Component enables you to borrow against the policy to meet your financial needs.
- Tax-Free loans and Death Benefits.
- Fixed Premiums.
Cons
- Whole Life Insurance is much more expensive than term life insurance.
- You may need to pay surrender charges if your policy gets lapses within the first few years.
- Unpaid loans will be deducted from your Death Benefit.
Whole Life Insurance is a great choice if you can afford higher premiums and want to leave more money for your loved ones.
| Features | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Choice of Policy Length | ✔ | ❌ |
| Cash Value Component | ❌ | ✔ |
| Lifelong Coverage | ❌ | ✔ |
| Fixed Premiums | ✔ | ✔ |
| Guaranteed Death Benefit | ❌ | ✔ |
| Low Premiums | ✔ | ❌ |