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Term Life vs Whole Life Insurance – The What & Why

Posted In:Life Insurance
Mar 2, 2023
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If you’re in the market for life insurance, one of the first questions you’ll need to answer is whether the term life vs whole life is the right fit for your needs. Of course, to make that decision, you will first need a deep understanding of what both types of policies entail, what the benefits of either are, and what drawbacks each includes.

Term Life vs Whole Life: $$$ and Longevity Are the Main Differences

Cost and longevity are the main differences between term and whole life insurance. When compared to whole life insurance, term life insurance is less expensive. It insures you for a specific amount of time and pays out if you die during that time.

Whole life insurance covers you for the rest of your life and includes a savings component known as “cash value,” making it a more complicated and expensive product.

A Basic Overview of Term Life Insurance

The basic concept behind term life insurance is that it covers you for a set length of time, such as 10, 20, or 30 years, and pays you if you die during that time. Your beneficiaries will not receive any money if you live longer than your policy period. The death benefit and your insurance premiums are guaranteed to remain the same for the duration of most policies.

The period of your term life insurance policy should, ideally, correspond to the financial commitment you’re covering. For example, if you’re a new mom, you might get a 20-year policy to cover you until your child is no longer financially reliant on you. Term life insurance is sold by all the major life insurance providers, making it simple to find and compare life insurance quotes online.

This type of term life insurance is sometimes referred to as “pure life insurance.” This is because there is no cash component, and generally, the policies are not complicated: you pay a premium to cover you for a certain amount of money for a certain amount of time.

If you die during that period of time, your beneficiaries receive funds equal to your coverage amount. If you do not die while the policy is in place, then the policy expires, and no coverage will be paid out.

Term Life Benefit Plans Available through AWA

If you do not currently have term life insurance benefits, AWA can help. With various programs available, every member can find the coverage that works best for them. Available AWA Term Life benefit plans include:

  • The AWA HealthGuard membership includes valuable discounts and special offers on various consumer, business, and health care programs and services along with Accident and Sickness Limited Benefit insurance to help with out-of-pocket medical expenses. Additionally, the AWA HealthGuard Max membership includes Term Life insurance.
  • The AWA Life Plus ADD membership provides access to Term Life and Accidental Death & Dismemberment insurance benefits, which can help in the event of an unexpected accident.
  • AWA Life Plus Triad provides individuals and families with affordable access to health care with easy-to-use benefits that start right away, like Term Life, Critical Illness, and Accidental Death & Dismemberment.
  • AWA BasicGuard gives members access to Group Term Life Insurance benefits with Accident Only benefits during the 6 month waiting period and full benefits after the waiting period ends.

All of the term life insurance benefits available to AWA members are underwritten by either Amalgamated Life Insurance Company or Guarantee Trust Life Insurance Company, both long-standing, A-rated carriers.

A Basic Overview of Whole Life Insurance

The most prevalent type of permanent life insurance is whole life, which is more expensive than term life because most policies are designed to last a lifetime and pay out regardless of when you die. There is a cash value component to whole life insurance. The account is funded with a portion of your premiums, and it increases over time. You can borrow against the account or surrender the policy for cash once you’ve built up enough value.

Whole life insurance is more basic than other types of permanent life insurance, despite being more complicated than term life insurance. Premiums are guaranteed to stay the same for the rest of your life, and the cash value account grows at a constant rate. The death benefit is likewise assured unless you take out high cash value loans. While you are not required to repay loans if you borrow against your policy, any outstanding loans will be deducted from the final death benefit paid to your beneficiaries.

Most whole life insurance policies are “participating,” which means you may be eligible for payouts based on the company’s financial performance. Dividends can be used in various ways, including increasing the cash value of your policy.

Whole life insurance is often referred to as “permanent life insurance” because (as long as you pay your premiums, it is generally permanent.

Term Life vs Whole Life insurance: A Cost Analysis

Term life insurance is temporary and has no cash value, which means that it is often the most affordable option.

Because the coverage lasts your entire life and the policy accumulates cash value, whole life insurance rates are substantially higher. That said, with whole life insurance, the portion of your premium dollars that are invested grows on a tax-deferred basis. This can have long-term cost benefits as you will not pay taxes on those gains.

Choosing Term Life vs Whole Life: Which is the Best Option for You?

For most families, term life insurance is sufficient, but whole life and other forms of permanent coverage might be beneficial in specific circumstances.

If any of the following situations describe your life, then term life might be the right choice:

  • You only need coverage for a specific amount of time. For example, some people choose a term life policy covering them as long as they expect to have children living in the home or until their mortgage is paid off.
  • You want the most affordable option. Term life insurance is the least expensive option, especially if you’re young and healthy.
  • You can’t afford whole life insurance. In some cases, a younger, healthy person will start with a term life insurance policy that can later be converted to a whole life policy. This allows them to pay lower premiums now and increase those premiums to get better coverage in the future. Be sure to read your policy carefully, as there are deadlines for conversion, and those deadlines vary by policy.
  • You aren’t looking at your life insurance policy as an investment. Some people have the money for whole life insurance but prefer to invest it elsewhere. They might choose the lower-cost term life insurance policy and use what they would have spent on upgrading to whole life insurance to bulk up their investment portfolio.

If any of the following situations describe your life, then whole life might be the right choice:

  • The higher premiums are not a problem. If you can comfortably afford to pay the higher premiums, you might want to do so. Remember, though, that if your financial situation changes in the future and you miss payments on your whole life insurance policy, your coverage could lapse.
  • You want to leave money for those you leave behind. You might think of whole life insurance as an inheritance you’re leaving for your beneficiaries.
  • You have a dependent with disabilities. If you have a child or other lifelong dependent with disabilities, whole life insurance could be used in lieu of a trust to ensure they are cared for after your death.
  • You want guaranteed cash value. With a whole life policy, the cash value goes up by a guaranteed rate that your insurer sets.
  • You want a guaranteed premium amount. The premium you pay on term life insurance can fluctuate, but your premium is locked in when you buy whole life insurance. As the years go on, you will always be able to budget your monthly premium without worrying about increasing premiums.

If you’re still on the fence about term life vs whole life insurance, ask yourself the following questions. Your answers could help you better understand which insurance product would work best for you.

  • How old am I and what do I think my life expectancy is?
  • How good is my health?
  • How significant are the financial needs of my family?
  • How old are my children?
  • What is my concern level regarding the cost of long-term health costs?
  • How much is my mortgage and other fixed debts?
  • What are my realistic retirement plans?
  • Do I have money saved for my child’s college?
  • Who will pay for my funeral expenses?
  • What are the estate planning ramifications of my choice?
  • Is an estate or trust being set up as part of my will?

Get Answers to Questions about Term Life vs Whole Life Insurance

Do you have questions about term life vs whole life insurance? Keep reading to find the answers you need.

Which is the better option for most people: term life vs whole life?

There are benefits to both options. Whole life insurance is permanent, provides many ways to protect your family’s finances over time, and has a cash value investment aspect. That said, if your primary concern is the largest death benefit paid per dollar, then term life could be the right choice.

What happens to the money I’ve spent on a term life insurance policy once it expires?

You will not get it back. If you need further coverage, you can buy a new policy. That said, you will generally pay more as your rates go up as a person ages.

Is it possible to cash out a term life insurance policy?

No. The policy does not build value.

How can I use the cash value of my whole life insurance policy?

There are many ways you can use the cash value of your whole life insurance policy while you’re alive. While it will take a few years of paying premiums to accrue a useful amount, once you have you can use that money in a number of ways.

For example, you could borrow money against the policy’s cash value in the form of loans or withdrawals. You could use the value you’ve accrued to pay the policy’s premiums. If you get to retirement age, you can even surrender the entire policy and use it to supplement your daily expenses.

Will my heirs have to pay taxes on money they receive from my life insurance policy?

In most cases, neither whole life nor term life benefits are taxable. That said, it can vary based on several factors. It is always wise to talk to your tax professional to determine what would happen in your specific situation.