Term vs Whole Life Insurance: Coverage and Costs

Life insurance is a contract between an insurer and a covered individual. In exchange for a monthly premium payment, the insurance company agrees to pay a specific amount of money to a beneficiary when the covered individual dies.

This type of insurance gives covered individuals the peace of mind of knowing that their families won't have to struggle to pay their living expenses due to an untimely death.

Insurers typically offer two types of life insurance policies: term and whole life. Both types of coverage have pros and cons, so it's important to understand what to expect.

Keep reading to learn more about term vs whole life insurance coverage.

Term vs. Whole Life Insurance: The Basics

Term life insurance provides coverage for a certain number of years. For example, the term on this type of policy may be 20 or 30 years.

In contrast, whole-life policies provide lifelong coverage. The difference in coverage makes whole-life policies more expensive; however, whole-life policies also build cash value, while term policies don't.

Term policies may be classified as renewable or convertible.

• Renewable plans give the covered individual the right to sign up for another term of coverage when the first term ends, regardless of his or her health status.
  
  
• Convertible policies allow the covered individual to convert a term plan to a permanent plan.

Insurance Premiums

When it comes to life insurance costs, term coverage is less expensive. This is because it only lasts for a specific amount of time.

If a 30-year-old man buys a term policy with a coverage period of 20 years, his coverage will end when he's 50 years old. If the same man buys a whole-life policy and lives to be 80, he'd be covered for 50 years instead of 20.

The longer coverage period is what makes whole-life policies more expensive, and it's also the reason whole-life policies are considered a type of permanent life insurance.

Cash Value

When comparing term vs whole life insurance, you may see the terms "cash value," "builds cash" or "guaranteed cash." These terms indicate that whole-life policies are an investment as well as a type of insurance coverage.

When a covered individual pays premiums, a small portion of the premium is set aside in an investment account. The account earns interest, helping the investment grow and giving the policy cash value. Investors pay no interest on the growth until they withdraw their funds, making whole-life policies an option for investors looking for accounts that produce tax deferred returns.

Some insurers sell whole-life insurance and universal life insurance. Although these policies have some similarities, they're not exactly the same.

• Whole-life policies gain value at a fixed interest rate set by the insurance company.
  
  
• In contrast, universal policies gain value based on market rates. The value of a universal policy may also change based on the financial performance of the insurer.

If market interest rates increase, a universal policy has the potential to earn more than a whole-life policy; however, risk-averse investors may prefer to lock in a fixed rate instead of worrying about whether market rates are up or down.

Purchasing a whole-life policy can also help investors avoid losing value due to the poor financial performance of the insurance company.

Eligibility Requirements

Another major difference between term vs whole life insurance is the eligibility requirements.

To purchase term coverage, an individual usually has to undergo a medical exam. If the exam reveals any underlying medical conditions, such as diabetes or high blood pressure, it's up to the insurer whether to charge a higher premium or deny the application altogether.

Insurers also charge higher premiums to overweight customers and customers who use tobacco.

The Bottom Line

Term and whole-life policies both provide peace of mind for individuals who want to protect their families.

Term policies have no cash value and only provide coverage for a limited amount of time. As a result, term premiums are lower than whole-life premiums.

Whole-life policies are more expensive, but they build cash value that can be used to pay for future premiums. In the event of an emergency, a covered individual may even be able to take out a loan against the cash value of a whole-life policy.

Any consumer with questions about term vs whole life insurance should talk to a qualified insurance professional to learn more about the advantages and disadvantages of each type of coverage.