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Term vs Whole Life Insurance

January 04, 2022 · 8 minute read

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Term vs Whole Life Insurance

Once you’ve decided it’s time to buy life insurance, the big question is whether a term or whole life insurance policy is right for you. Both achieve the same goal — protecting your loved ones from financial hardship when you aren’t there to provide for them. But they go about doing this in very different ways. To decide which one to buy, a little knowledge is an important thing. Getting life insurance is a major investment, much like shopping for a home or a car; you need to understand the features and costs involved. Once you have a handle on that, and think about your needs, preferences, and budget, you’ll know which policy is right for you. It’s a very personal decision. Just because your bff swears by whole life insurance and both of you are married with a baby, that doesn’t mean it’s right for you!

Let’s take a look at what each policy offers and highlight some considerations. By the end of this article, you should have a good idea of whether buying term or whole life insurance is right for you. Now, it’s time to dive in!

What Is Term Life Insurance?

Term life insurance, just as the name implies, provides coverage for a set term or number of years. What that means is, if you die (sorry, that word is going to come up when discussing this topic) during the term of the policy, your beneficiaries receive a lump sum payment. So if you take out $500,000 of term life insurance for 20 years, if you, the policy holder, were to die at year 19, your loved ones would receive the half-million dollars. If, however, the policy ends after 20 years and you were to die a few months later, there’s no benefit at all.

What’s good about term life insurance is that it gives you coverage when you may need it most. With terms typically running 10, 15, 20, 25, or 30 years (though other variations are available), this kind of policy can give you the reassurance that, even in the worst case scenario of your death, expenses like tuition, housing, and daily living costs would be covered. Many people purchase a term that will see them through the end of a mortgage or a child’s graduation from college. (Some insurance providers offer the option of extending a policy as it comes to its conclusion. This is known as renewable term life insurance; check prices in advance as these extensions can be for a brief time period and very costly.)

It’s worth noting, though, that if you buy, say, a 30-year term life insurance policy and are alive at the end of that time period, you don’t get a refund of the funds you’ve doled out. You have paid for protection but you didn’t use it. This may strike some people as “throwing away” their money. For people who have that sentiment, there are options like “return-of-premium” policies that can help you recoup costs.

This kind of life insurance is usually considerably more affordable than whole life, which we’ll explore in a minute. Because you are only buying protection for a specific time period, the premiums (the monthly fee you pay for coverage) are typically lower and are fixed.

What Is Whole Life Insurance?

Whole life insurance, on the other hand, is a popular 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 receive a lump sum payment whenever he or she passes away. This can offer tremendous peace of mind and may feel like a necessity if, say, you have a loved one who has a chronic health condition and/or cannot live independently.

Beyond that security, whole life insurance is a more complex financial product than term life insurance. It’s essentially a bundled insurance policy plus savings account. What’s known as “cash value” is built into the policy so you are building equity. Part of your premium, the monthly payment, is usually diverted into a separate account; that account can earn interest and may be tapped, as a loan.

This is not the only kind of life insurance policy with a cash account attached to it. For those who want their cash account to grow in different ways, there are also these kinds of permanent life insurance:

•   Universal life insurance, which earns interest on the cash value account and may allow for flexible monthly payments.

•   Variable life insurance, which allows you to invest the cash part of your policy in stocks, bonds, and mutual funds. While these can grow your money faster, they also bring some degree of financial risk if the market drops.

•   Variable universal life, which gives you the ability to invest your savings account in stocks, bonds, and the like, as well as flexible premiums depending on how your cash value performs.

•   Indexed universal life, in which your cash account is linked to a stock-market index. It earns interest based on this index, but often there is a minimum rate of return (as well as a limit on how high the interest can go), which makes it less risky than a variable universal life plan.

In general, whole life and the other kinds of permanent life insurance usually have higher initial premiums than term life insurance (its cost may even be a multiple of what you would pay for term insurance). This is due to its lifelong “in effect” status and the way it can help you grow the money in your cash value account.

How Do Term and Whole Life Insurance Differ?

Some people hear the differences between term and whole life insurance policies, and know in an instant which one is right for them. Other people have to mull the options for a while and maybe want to make a “pros vs. cons” list. If you fall into the latter camp, don’t worry. You will find the right product for your needs. Let us help by summarizing some of the key differences right here.

Difference 1: Policy Features

Term Life Insurance

Whole Life Insurance

Only provides coverage for a specific time period Provides coverage for your entire life
Monthly premium payments tend to be considerably more affordable Monthly premium payments tend to be considerably more expensive
Only a lump sum death benefit is paid by the policy These policies have both a lump sum death benefit and a cash value savings account
Monthly premium payments tend to be fixed Monthly premium payments may be variable, and the cash value can sometimes be used to pay the premium

Difference 2: Costs

The cost of a policy is undoubtedly a huge factor in making your decision. So let’s cut to the chase: Whole life insurance costs up to 15 times more than term life for the same amount of coverage.

That’s because whole life insurance provides lifelong coverage and also includes that “cash value” savings component. It’s a more complex financial product, while term insurance is just straightforward coverage for a certain number of years.

Also know 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.

How to Choose Between Term and Whole Life Insurance

When deciding which kind of policy to buy, there is no hard and fast rule; all that matters is what’s right for you. Consider these questions to help figure out your best option.

1. How long do you need coverage to last?

Do you need coverage to last your entire life, perhaps to fuel a trust for your children or provide a death benefit for a family member with a disability? Then you will probably be happiest with whole life insurance, meaning a death benefit will be paid, even if you live till well past age 100, and the security that brings.

If however, you only need to know that a certain time frame is covered (say, the length of your mortgage or until your youngest graduates from college), then term life may work best for you. A policy can usually be purchased in various increments between 10 and 30 years.

2. Do you want just coverage or savings too?

Some people are just shopping for a policy that offers protection and peace of mind. They want to know that, when they die within a certain time frame, their loved ones would receive money to cover expenses. For this insurance shopper, a term policy is probably perfect. It will pay a lump sum benefit if the policy holder dies within the term.

If however you are looking for a product that doesn’t just offer coverage but also helps you save, then a whole life plan may be the best bet. These policies also have a cash value account that will grow over the years.

3. How much can you spend on life insurance?

There’s a pretty big disparity in the price of the two main kinds of life insurance. Whole life policies, which deliver ongoing, permanent coverage, typically cost much more than term insurance, which is only active for a limited number of years. Estimates say that a person will have to spend anywhere up to 15 times more for whole life versus term insurance. Also, the interest on the cash value of a whole life policy is usually subject
to taxes
, as well.

4. Does my age determine whether I should get term or whole life insurance?

In general, your age doesn’t determine whether you should buy term or whole life insurance. For instance, people often purchase a policy when they marry or are expecting their first child. These milestone events mean you have people depending on you, and you may well think now is the time to get life insurance coverage. However, whether you decide on term insurance that runs until your child’s 21st birthday or whole life insurance which delivers permanent coverage is a matter of personal preference and finances.

There are some cases in which term insurance is likely to be the better bet. For instance, if you and your partner took out a mortgage together, you might want term insurance that covers the length of your home loan. That way, if anything were to happen to you, your spouse doesn’t wind up being solely liable for all that debt. Another scenario is buying life insurance when you are quite old and want to get coverage. In this case, term life insurance is likely to again be a good bet. You could buy a term of 10 or 20 years if you are in good health. For those with medical issues, what’s called simplified issue or guaranteed issue term insurance may be best. These are typically small policies that cover end of life expenses, and they require no medical exams.

5. What if I Already Have Life Insurance and Want to Change My Policy?

It’s human to change your mind! No matter how much research you do, time and circumstances can make you rethink your purchase. Some term life insurance policies can be turned into whole life or other types of permanent insurance. This may have to occur within a certain time window, and it’s likely to trigger pricier premiums. Talk to your insurance company about your options. Your term may also be renewable or extendable.

With whole life insurance, changes to the policy may result in surrender charges, since the policy is a permanent one. Check with the policy provider to know what to expect.

The Takeaway

Now you know the key differences between these two popular forms of life insurance. While no one wants to think about their death, the silver lining to life insurance shopping is you know you’ll secure a way to provide for your loved ones when you’re no longer here. To recap the two different approaches: Term life insurance has a time limit on coverage, and tends to be considerably more affordable. Whole life is a form of permanent life insurance that offers lifelong protection and an additional cash account, but tends to cost much more than term. As you weigh your needs and options, don’t be swayed by what others buy. This is an important financial decision; one that must be tailored to your specific situation, finances, and aspirations — and yours alone!

Take the Next Step and Get Great Life Insurance

Because term life insurance is a popular option, SoFi has teamed up with Ladder to help your family feel secure. Not only are these affordable and reliable policies, they also let you buy insurance in a hassle-free way — no paperwork, no calls with pushy, hard-sell agents, and no change fees (qualified customers can lower the coverage amount with a few clicks or apply for more coverage).

Check out term life insurance with Ladder for an easy and affordable approach to protecting the ones you love


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
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