Which is better term or whole life insurance? Try our cost calculator.

When shopping for life insurance, one of the biggest questions that can come up is which is better term or whole life insurance?

The answer to this question is, it depends. Term life insurance is better for someone who needs low-cost and temporary life insurance needs.  Whole life insurance is better for someone who needs permanent protection and wants to build up cash value or estate planning.

In this post, we will simply explain the difference between term and whole life insurance so you can better understand which policy to choose.

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Term vs.Whole Life Insurance. How to Choose

Term life insurance explained

Term life insurance is considered to be the most basic, pure form of life insurance coverage available. This is because term life provides death benefit protection, without any cash value or investment build-up. Because of this, term life insurance is typically a more affordable form of coverage – mainly if you are young and in relatively good health at the time you apply for it.

As its name implies, term life insurance is purchased for a certain amount of time, or “term.” These time frames can be as short as just one year, or as long as thirty years…or more.

Often, the amount of the death benefit and the amount of the premium charged will remain level throughout the entire length of the coverage term.

Just like with other types of life insurance coverage, the death benefit from a term life policy will payout to a named beneficiary (or beneficiaries) if the insured passes away while the policy is still in force. These benefits are received income tax-free.

What happens at the end of my term?

Once the term of coverage has ended, you may have to purchase another life insurance policy if you still want coverage. This policy and its corresponding premium would be based on your then-current age and health condition. So, you will be required to pay more in premium costs, provided that you are still insurable.

Term Conversion Options

However, depending on the specific term life insurance policy that you have, it could be possible for you to “convert” the plan into a permanent life insurance policy. In doing so, you can lock into coverage for the remainder of your life, provided that the premium is paid.

The most significant benefit of a conversion option in a term policy is that you do not have to prove insurability to convert your term to a permanent policy. So if you were to get sick or maybe even get diagnosed with a terminal illness, then you can convert your term policy to a permanent plan to make sure you do not get in a situation where your term policy could expire.

Advantages and disadvantages of term life

There are a number of advantages to purchasing term life insurance. The biggest advantage with term life is typically the most affordable type of life insurance on the market today. Due to its simplicity (i.e., death benefit only coverage), you don’t have to pay for a long list of other “bells and whistles” – which can be especially beneficial if you do not need them.

Term life insurance can offer a great way to cover the unpaid balance of a mortgage, as well as other “temporary” needs – and it can do so at an affordable premium cost.

While there are many nice features associated with term life insurance, it isn’t right for everyone. For instance, many people like the savings or investment component that is associated with permanent life insurance policies.

Also, there are some cases where an individual would prefer to lock in his or her coverage, regardless of whether they contract an adverse health condition in the future (which in turn could make them uninsurable).

Term Insurance AdvantageTerm Insurance Disadvantages
Low costCoverage ends at a certain date
High coverage amountNo cash value or “equity” build up
SimpleExpensive at older ages
Death benefit is income tax-freeNot good for longer term coverage needs
May be convertibleCould leave an insured uncovered

Whole life insurance explained

While this type of life insurance policy offers both death benefit protection and a cash value component. With this type of insurance policy, the coverage and the premium are typically locked in for life, regardless of the insured’s increasing age over time, and whether or not they contract an adverse health issue. It’s sometimes used for retirement planning like the 7702 or be your own banker strategy.

How does cash value grow?

The funds that are inside of a whole life insurance policy’s cash value are allowed to grow at a rate of return that is set by the insurance company. These funds grow and compound on a tax-deferred basis. This means that there is no tax due on the gain unless or until the money is withdrawn. Due to the safety that is offered with this cash value policy, the rate of return is typically quite low and is comparable to that of a CD or money market account.

Can I get my cash value out?

A whole life insurance policyholder can take cash out of their policy either by way of withdrawals or loans. There can be pros and cons to either of these options.

  • Policy Withdrawals – When a policyholder withdraws money from the policy, the funds are not taxable, at least up to the amount of the “basis.” Basis refers to the amount of money that has been deposited. Any amount over and above that will be considered taxable gain unless taken as a policy loan. It is important not