In many ways comparing whole and term life insurance is like comparing apples and oranges. Although they both offer death benefits, everything else is different.
Term life insurance costs less initially and runs for a specific term, hence the name. The policy guarantees premiums only for the initial term and if you renew it, the premiums may change. The policy itself has no collateral value and you cannot use it as an asset to borrow money.
Whole life insurance tends to cost more initially, but the premiums are guaranteed to stay at that level for the life of the policy. The policy can be used as collateral to borrow money against.
The advantages of term life
Term life insurance is a great option when you cannot afford the protection offered by whole life or when you need coverage for a specific time period. Your initial premiums are less than whole life, but will increase at the end of the term whether it is 1-year, 5-years or whatever length the term runs for.
Term life insurance is perfect for families that are growing or to supplement existing insurance when cash resources are scarce. There is no cash value on term life insurance so it cannot be borrowed against, keeping its value full during the entirety of its course.
Advantages of whole life insurance
As opposed to term life, whole life insurance provides death benefits. It also accumulates value while it is active. You are eligible for dividends on the value and you can borrow money against it.
The biggest advantage, however, is that once you have been approved for whole life insurance, it can never be cancelled as long as you pay your premiums. No matter what happens, you will have life insurance and your death benefits will be paid.
Comparing apples and oranges
It’s easier to look at the benefits in comparison to each other:
- Death benefits Death benefits
- Premiums guaranteed for initial term Premiums guaranteed for life of policy
- Inexpensive initially, premiums may rise Higher initial price, premiums never increase
- No value other than death benefits In addition to death benefits, offers loans against accrued value or surrenders
- Conversion to whole life may be available No conversion necessary
When it comes to insurance, some is better than none, but having the wrong kind of insurance can make it difficult to use it the way you need it, not just the way it is set up.
The entire debate between whole life vs term life insurance can be summed up with this example:
- If you had a term policy that you had maintained for 30 years, through multiple premium increases, it would still only be worth its face value if you died.
- If you had a comparable whole life insurance policy, through the same number of years, your premiums would not have changed from day one and you would be able to borrow against the value of the policy or surrender some of the value to put cash in your pocket.
The increase in premiums through the term policy would have brought the total spending to a roughly equal state but the whole life policy would be worth far more because you can do more with it than just pay off the beneficiaries when you die.
With term life, you are betting against an insurance company that you will die before the policy expires, while with whole life, you are betting that you will live long enough for the policy to be worth more than its paper value.