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6 Similarities & Differences Between Term & Whole Life Insurance

When it comes to life insurance, making the decision between term and life can be a difficult choice. If you don’t know where to start, shopping for life insurance can be an overwhelming experience. They each have their own distinct features and benefits which make them better suited for different kinds of people who are at different stages of their lives. In this blog post, we are going to take a look at the similarities and differences between whole and term life insurance policies. Additionally, we will look at what kind of consumers may benefit from a term or whole life policy.

Similarities of Term & Whole Life Insurance

First off, let’s look at the similarities that term and whole life insurance share.

Purpose

To start off, people buy term and life insurance for more or less the same purpose. At the end of the day, you buy life insurance to insure someone’s life and to leave something behind for loved ones when you pass away. For many people, it is very important to them that their family is squared away financially, even if they pass away. Life insurance is a useful financial tool for providing people with peace of mind that their family doesn’t need to worry about paying bills after they’re gone.

Process to Obtain

Secondly, the process that you must undergo to obtain both term and whole life insurance is very similar. It involves answering a number of questions about your health, your family’s health history, and your lifestyle. In addition to these questions, there is typically a medical examination involved. Using the information that is collected, insurance companies are able to make a determination as to if they are going to accept or deny coverage for that person. It also helps them decide what they are going to charge in premiums. Some of the key factors in determining someone’s insurability is their age, if they’re a smoker or tobacco user, their occupation, and overall lifestyle.

6 Similarities & Differences Between Term & Whole Life Insurance

Customization

Lastly, customization is the last commonality between term and whole life policies. Riders are things you can add to a policy in order to change or enhance the coverage. Some common riders that people elect to use is waiver of premium rider, which waives the premium if you become permanently or temporarily disabled. The return of premium rider is also commonly used, which pays you your premiums back if you are still alive at the end of a term policy. Riders are useful tools for enhancing the customization of your policy so that you are able to get the most out of it, and they can be used for both term and whole life policies.

Differences of Term & Whole Life Insurance

Now that we have discussed the similarities of term and whole life insurance, let’s look at some of the differences between the two.

Duration

The first, and possibly biggest, difference between term and whole life is the duration of the policy period. Term life insurance is for a limited, specified amount of time. The policy period for term life insurance is usually in 10, 20, or 30 year increments. If the policyholder is still alive at the end of the term, the term policy is cancelled unless it is renewed or converted to a permanent policy. For whole life, the policy is in force for the rest of the insured’s life, provided that they continue to pay their premiums.

term vs whole life insurance - duration chart

Cash Value

The cash value component of a whole life policy is the key feature that distinguishes it from a term policy. The cash value component is like a savings account that is connected to your whole life policy. It is tax-deferred and has a guaranteed interest rate, which makes it a valuable investment tool. This cash value can be used in multiple different ways, including loans, withdrawals, and premium payments just to name a few. Term life insurance policies only pay out a death benefit if the insured passes away during the policy period, and there is no cash value component. Click here to learn more about cash values for life insurance.

Cost

The cost of the policies is another notable difference between term and whole life. Term life insurance is usually quite a bit cheaper than whole life insurance policies. This is due to a few different reasons. The most obvious reason is the length of the policy. Because term is only for a limited time, you can understand why it would be less expensive than a policy that is in force for the rest of your life. The other reason why term is cheaper than whole life is that there is no cash value component of a term policy. More of your premium is going straight towards paying the actual costs of insurance, so the overall required premium is lower.

Summary

Life insurance plans are useful tools for financial planning. There are multiple kinds of life insurance, but term and whole life are the most common. Term life is for a limited period of time, and is usually in 10, 20, or 30 year plans. Whole life offers you coverage for the rest of your life, and consequently, is more expensive than term. Whole life also has a cash value component which has a guaranteed interest rate and slowly grows over time like a savings account. If you are in the market for a life insurance policy, reach out to Narrows Insurance and one of our knowledgeable agents can help you obtain the proper coverage.

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