Term Life Insurance vs. Whole Life Insurance

While promising similar benefits, “term” and “whole” life insurance are often considered as two entirely different types of policies. As it turns out, the differences between term and whole life insurance go beyond the duration of coverage.

What is whole life insurance and how does it work?

That’s a big question! For a deeper look into the answer, we recommend looking through our blog post on Life Insurance Basics. In this post, we’ll explain what whole life insurance is by comparing it to term life insurance. Understanding these less-obvious differences between the two kinds of policies can help you make better financial plans for your future.

What’s the Difference?

• Duration of Coverage: This is the simplest difference to identify. Term life insurance provides coverage for a term, or specified period of time (20-30 years, for example–although they can be as short as one year). So, what does “30 year term life insurance” mean? It means that for a duration of thirty years, your insurer has money set aside to provide your beneficiaries with a death benefit, should you pass away within that time period. After that point, without a renewal, you won’t have coverage, meaning no death benefit will be provided when you pass away. On the other hand, whole life insurance provides coverage for, well, your whole life–from the time you purchase the policy to the time you pass away.
• Features: Both term and whole life insurance promise a death benefit to the policy holder’s beneficiaries after they die. (Assuming premiums are paid up and the policy holder dies within the insured duration of coverage.) A whole life policy, however, is also able to accumulate cash value. A portion of your premiums are set aside into something resembling a savings account, where it grows with each premium payment plus a guaranteed rate of return, and potential annual dividends. This conservative place to grow or save money can be a powerful asset, and is another main difference between term and whole life policies.
• Cost: As you might expect, a whole life policy’s duration and additional ability to accumulate cash value makes it more expensive when looking at the initial premium payments alone. However, someone hoping to renew their term life insurance after it expires may find themselves paying a lot more than their original preferred rate–and for a smaller amount of coverage than they were offered when they first applied 20-30 years ago. Meanwhile, a whole life policy holder will have the same premiums, and same amount of coverage as the day they first bought the policy.

What happens when your term life insurance expires?

Once your term life insurance expires, you lose coverage. Meaning that, should you die the day after your policy expires, your insurer would have no obligation to provide your death benefit. For some people, this might be fine. Their term policy would have replaced their income had they passed away, but now they are retired, their home is paid off, and their kids are out on their own.

What should you do when your term life insurance expires?

For those alarmed by that prospect, or who want to maintain their coverage, your insurer likely offers a policy renewal. However, at later ages, the premiums for each term renewal can far exceed the premiums of a traditional whole life policy started at the same age as your term policy. Depending on your age, switching to a whole life policy might still cost more in the long run.

Everyone’s situation is unique–and as such, should be studied out and discussed with a trusted financial advisor before big decisions are made. For those looking for temporary coverage, and lower premiums, a term life insurance policy may be the best for you. For those looking for life-long coverage, a guaranteed death benefit, and perhaps a conservative place to save money, a whole life policy is likely the way to go.

For those who decide to go the whole life route, Aspen Life Settlements offers a compelling way to sell your policy while maintaining your death benefit. To learn more about this option, check out our recent blog post that describes the process.