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There are important features to consider when you evaluate life insurance options. The “term vs. whole life insurance” debate reflects the differences between two types of policies that are offered by many life insurance companies.
Both types of life insurance policies share a common aim—protecting families from financial loss. But how they do it differs significantly. Those differences affect how much you might pay, as well as what’s included in your policy. Of course, everyone’s situation is unique, and so none of what you’re about to read should be considered tax or legal advice or the final word in any sense.
What we have here is a high-level overview of key terms and things to think about—things that we hope will be helpful if you’re starting to think about whether life insurance is right for you. With that said, let’s dive in!
What Works Best for You?
Much has been written about term vs. whole life insurance policies. Here’s the gist of it:
Term life insurance takes a straightforward approach to providing a financial safety net. A term life policy owner pays regular payment amounts for a set period of time (known as the “term”).
Generally, how it works is if the policy owner dies during that term, the insurance company pays the coverage amount—if the policy owner dies after the term has ended, he or she does not get a payout.
The goal of term life insurance is to have a policy in place during the time period when you need it most, should a tragedy happen—like when you have young children, a mortgage, or other debts that could require significant financial support.
Whole life insurance, on the other hand, is a type of permanent life insurance that offers coverage for a lifetime.
Generally speaking, once you get a policy, it stays in effect for the rest of your life, unless you cancel it. The policy owner’s beneficiaries are paid out whenever he or she passes away.
Whole life insurance is a more complex product than term life insurance, because “cash value” is built into the policy. Essentially, it is a bundled insurance/savings product.
In general, whole life insurance usually has higher initial premiums than term life insurance.
Exploring the Differences Between Term Life Insurance and Whole Life Insurance
Here are five things to consider when evaluating term vs. whole life insurance. Being aware of your options can help you make the right decision for your specific needs when selecting the type of life insurance policy you want to buy.
1. How do Term Life and Whole Life Policies Differ?
Term life insurance is designed to do one thing—cover you for a designated amount of time and pay the claim amount to your beneficiaries if you die within that time period. Your monthly payments are fixed and you generally know exactly what you’re getting.
People who prefer term life may feel they will have enough money saved on their own by the end of their term to not need their income replaced. Or they may believe their beneficiaries will become financially independent by the time the policy ends, so there would be no need to continue to pay for coverage.
Whole life insurance has predefined regular payments too, but they might be paid for the customer’s entire life. Some people may like whole life because when they make payments they are also contributing to a cash value that can be leveraged later in life for a variety of reasons (more on that in the next section).
But because whole life payments have to be allocated to both the insurance product and a cash value component, it can be difficult to track returns versus costs. The interest on the cash value is usually subject to taxes, as well.
2. What are the Costs of Term Life vs. Whole Life?
Generally, term life insurance costs in the neighborhood of 3X-10X less than whole life for the same amount of coverage (you can see an example of the math in this article).
That’s because whole life insurance provides lifelong coverage and also includes a savings component—called the “cash value.” The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy.
If there are no outstanding loans placed against the policy, there may be a cash value paid to the owner if the whole life policy is surrendered before the insured person dies. It should be kept in mind that while the cash value portion of a whole life policy can be tax-deferred over the life of the policy, when you redeem the cash value there are usually tax implications due to the interest accrued.
Term life insurance covers you for a specific number of years as opposed to your whole life, and has no cash value. If you die during the term period, your beneficiaries will receive the death benefit. If you live beyond the term period you had selected, no benefit is payable.
3. Which is the Right Choice for Me—Term Life or Whole Life?
The savings component of whole life insurance can be nice, but you do not have the ability investment strategy on your own.
Long story short, choosing the type of life insurance for your unique needs is a matter of how you want to invest your money and how much control you want to have. Other factors like your marital status, the age and number of your dependents, your anticipated family income, and debt obligations may also play a role in determining what is right for you.
4. What if I Already Have Life Insurance and Want to Change My Policy?
One of the benefits of term life insurance from Ladder for qualified customers is there are no change fees: you can lower the coverage amount with a few clicks or apply for more coverage—with no hassle, no paper forms, and no calls with commissioned agents to get it done.
You should check with each life insurance provider you consider, however, so you know what fees to expect (or not).
With whole life insurance, changes to the policy may incur surrender charges or withdrawal penalties, change fees, or administrative fees when changes are made, since the policy is a permanent one.
For instance, with policies that have a surrender charge, a fee is deducted from your cash value if you surrender (or end) your policy. Again, checking the fee policy of each provider you’re considering will help give you the best visibility into what to expect.
5. What are the Pros and Cons of Using an Agent to Get a Life Insurance Policy?
Agents can be helpful in bringing you up to speed on what life insurance entails and what the best option may be for you and your family—especially if you’re new to life insurance and feel a bit overwhelmed by it all. But keep in mind that many of them work on a commission basis and, in general, higher commissions are paid for permanent life insurance than for term life insurance, because whole life policies tend to be more expensive than term life policies.
These higher commissions can have negative consequences for customers—like paying more than they wanted or needed to, or buying the wrong product entirely (it’s one reasons Ladder doesn’t use commissioned agents). Consider how much help you need and what it may cost as you decide whether you’d like to work with a commissioned agent.
Why All This Matters
When someone dies unexpectedly, it can upend the lives of everyone around them, especially the people who were depending on the deceased for financial support. Term life Insurance from Ladder can help your family feel secure—because some basic coverage when your family needs it most can make a big difference.
This content is brought to you by our friends at Ladder Insurance Services, LLC. That means all opinions expressed in this content are not necessarily held by SoFi—and are for purely educational purposes only. Nothing herein is intended to provide financial, legal, or tax advice.
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This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.
* Coverage amounts range from $100k to $8 million. Instant coverage is available to applicants who meet certain risk and eligibility requirements. A medical test may be required for applicants that do not meet these eligibility criteria.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.