What are the benefits of term life insurance vs. whole life insurance?
When considering which type of life insurance you should purchase, understanding the basics, benefits, and realities of both term and whole life insurance is important in making a decision that is best for you.
Term Life Insurance
Term insurance is the simplest type of insurance. You pay your premiums as scheduled and in return your insurer agrees to pay a death benefit should you die within that term.
The Benefits of Term Life Insurance
- Low initial cost. Term insurance can be purchased in large amounts for relatively small premiums.
- You can match terms to needs. Many people are concerned about paying off their mortgage, providing money for higher education, or replacing a portion of their income if the unthinkable happens and they pass away. These are typically temporary needs, which may last just a few years, or much longer. Matching these needs, with the proper amount of insurance, can allow your loved ones the time, and money needed to make important financial decisions.
- Convertible. Most term policies can be converted (age limitations typically apply) to a whole life policy if your temporary needs evolve into lifetime needs.
The Reality of Term Life Insurance
- The policy is temporary. Term insurance is designed to last for a specific amount of time (term). After the term period is over, many policies are guaranteed to renew on an annual basis at a higher premium, and may become unaffordable.
Whole Life Insurance
Whole life insurance provides a death benefit throughout your life. It also includes a cash value component that accrues value over time, allowing you to borrow or withdraw funds as needed.
The Benefits of Whole Life Insurance
- Lifetime coverage. A whole life policy covers the rest of your life, not just a stated term. As long as your policy is in force when you pass away, your beneficiaries will receive a death benefit.
- Build equity. Over time, a portion of the premiums you pay for a whole life policy become part of the policy's cash value. Once sufficient cash value has accrued, this cash value becomes available to you through loans and withdrawals. Any way you choose to use it — if you choose to use it — the cash value of a whole life policy provides an additional asset for your family. However, there can be consequences when you access cash value depending on the action and how you access the money 1 .
- Premium options. With a traditional whole life policy premiums are typically paid until age 100, but there are policies with a limited payment period where the premium is fully paid in a specific number of years.
- You may receive dividends. The insurer may pay dividends to whole life policy owners, depending on the company's financial performance . Dividends can be paid in cash, accumulate at a competitive interest rate, or purchase additional insurance within the policy, or even be used to reduce the premium. Although dividends are not guaranteed, the possibility of earning dividends is an attractive feature of whole life policies.
- Estate planning. It's not just for the wealthy. Many people want to leave assets for the next generation, do charitable giving, or provide for an individual with special needs. Whole life insurance can be an efficient way of passing money onto the next generation.
The Realities of Whole Life Insurance
- Higher initial premiums. It's a fact, whole life insurance has a higher initial premium than an equal amount of term insurance, but don't confuse cost with value. The benefits of lifetime coverage, and over time, the guaranteed cash value, and the eligibility to earn dividends makes whole life a good choice for building an additional asset class, and for providing for lifetime needs.
Good financial decision-making is based on solid research and sound advice. If you're considering term life insurance vs. whole life insurance, be sure to discuss your options with a State Farm® agent and consult your tax and legal advisor regarding your situation.
1 Unpaid loans and withdrawals will reduce the guaranteed death benefit and policy cash value. Loans also accrue interest.