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Official Guide to Term vs Whole Life Insurance (Providers & Quotes)

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Planning for the future can often be a daunting and overwhelming experience. Luckily, in the 160 years since its inception, life insurance has evolved into a variety of plans designed to create a safe future for every family.

Whether it be future college tuition, a monthly salary, or just your final expenses, you’ll be able to live with a sense of security that you can carry into your final days.

The two main types of life insurance, term and whole, were designed to give consumers the choice that such an important decision requires. These plans can also be further customized by applying riders at additional costs.

In this article, we’ll cover the two policies, their subtypes and riders, and how they can best apply to your future needs.

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Term Life Basics

Term life insurance is the most basic form of policy available. Most people will enjoy this policy for the simple fact that it tends to be the hassle-free option.

If you like knowing what you’re getting upfront with no further complications, this policy might be the best option for you and your loved ones.

What is term life?

Term life, in its most basic form, allows a predetermined death benefit as long as you pay an equal premium every month.

Not sure if a term life policy is right for you? This video from Edward Jones breaks down what a term life policy is, how it works, and what situations it can help with.

The policy only lasts for a set term, typically for a decade or longer, and can often be renewed at an increasing rate as long as you can continue to prove insurability.

The death benefit is the guaranteed amount the beneficiary will be paid when the insured dies as long as

  • Premiums are paid on time
  • The policy’s conditions are met

Premiums are monthly payments to the insurer that cover the cost of the risk on their investment over the term.

In other words, if you died earlier in the term, they would lose more money than if you outlived the policy.

The longer you pay premiums, the more money that the insurer will make. If you outlive the term, they can even potentially make more than the death benefit was worth.

This is where an insurer will use underwriting to determine the potential risk of you dying before the policy ends, as explained in the video below from Diversified Individual Brokerage.

After setting the premium and term of your policy, you will be asked to designate one or multiple beneficiaries to receive the death benefit.

A beneficiary is a person who you assigned to collect the death benefit. If you have more than one, the benefit will be split among them. You’re the only person who can choose a beneficiary, so it might be smart to include a backup.

Interestingly enough, if your beneficiary passes away around the same time you do, i.e. a car accident, it may be debated who died first. If you passed away initially, the money would go to your beneficiary’s estate. Otherwise, it would go to a contingent beneficiary or your estate.

If the death benefit goes to your estate, it would be taxable and may take much longer to be distributed.

Thus, having a backup beneficiary is important to ensure your loved ones get the benefit as soon as they need it.

There is typically no way to earn any return on your investment if you outlive your term other than a rider at an additional cost. Even then, you likely won’t make as much as you paid in premiums.

Who Should Consider Term Life

Term life is a good option due to its hassle-free approach to covering your life. That being said, it can apply better to some situations more than others.

Young families that are just starting will find that they may only want coverage for the years when they have young dependents. As a family grows older, they will have fewer financial needs. Even if it’s only for the first 10 years, you’ll find any unexpected financial burdens after your passing significantly dampened, and it may even help provide for your family’s future.

Similarly, those who provide the most for their families, such as single parents and breadwinners, may find a term policy ideal to provide a stable transition when the time comes.

Business owners just starting in their professional life would most likely want their business to continue after they’ve passed. The death benefit of a term policy can be used to cover business expenses and provide the opportunity to turn that business into a legacy.

Retirees or those approaching that age might find the simplicity of a term life policy ideal to provide last-minute protection for their loved ones’ future.

All You Need to Know About Term Life Insurance

Everything you need to know about term life insurance essentially comes down to the benefits and disadvantages.

Benefits of Term Life Insurance

Perhaps the greatest benefit of term life insurance, and the one that attracts the attention of so many customers, is the relatively low cost of the premiums. It’s not unheard of to see a $500,000 policy offered for $15 to $20 per month.

By contrast, other forms of life insurance can be upwards of several hundred dollars per month. Term life insurance can be more expensive under certain conditions we’ll discuss later.

Another benefit to term life insurance is that many companies offer policies with no medical exam necessary.

While this may seem like a risk to the insurance companies, they take into account where you live, your age and income, and other factors which are then compared to actuarial tables used to calculate average life expectancy. They can get a pretty good idea of how long you’ll live, barring any unforeseen circumstances.

Actuarial statistics have proven pretty reliable for the purposes of issuing term life insurance. Customers who develop serious and fatal illnesses on the short end of the term tend to be few in number.

So, while the insurance company may lose money on a handful of policyholders, in the long run, they do well based on the fact that most will not make a claim until the later stages of the term.

Disadvantages of Term Life Insurance

The primary disadvantage of term life insurance is that it offers no tax benefits or investment income.

It is sold as a cash-for-service product much the same way your auto or home owner’s policy is structured. With investment-based insurance policies, contributions can be made with pre-tax dollars, allowing the policy to build value before income taxes become due.

With the term life insurance policy, you make monthly premium payments out of your normal savings or checking account.

Adjustable premiums are another disadvantage of term life insurance. Although your insurance company cannot raise your premiums above a specified amount as dictated by the policy, it does have some wiggle room to move the price up or down based on current market conditions.

You may pay a monthly premium or $15 for the first two to three years, but then see an adjustment to $20 per month if financial conditions warrant. To some, a minor adjustment is not a big deal. But to others, even a small amount like $5 per month could be a deal-breaker.

Finally, the last disadvantage of term life insurance comes in the form of income replacement. A primary breadwinner may want his insurance policy to provide 20 to 30 years of replacement income after he passes.

Term life insurance was never designed to provide replacement income for the long term. It should cover your dependents while they adjust to the loss of your income. Thankfully, you can purchase term life which offers significant income replacement, but that will raise the monthly premiums to an amount that could well exceed $100.

Types of Term Life

As the original form of life insurance policy, term life has had many years to evolve to suit the varying needs of every family.

Whether you need the hassle-free option of a level policy, the variation in increasing and decreasing term, or the open-ended option that convertible offers, you’ll find a term policy that will fit your needs.

Level

The most basic form of term life insurance, level term guarantees an equal premium and death benefit as long as you pay on time every month. It’s no more complicated than that, which makes it popular for many consumers.

There is no chance of any potential earning for the insured, and you lose a great deal on your investment if you outlive your policy.

This policy is ideal for those new to insurance and finance options, as it’s the easiest policy available.

Increasing

An increasing term life insurance policy is exactly what it sounds like. Every year that you have the policy, your rates will increase by a predetermined amount, as will the death benefit.

This policy is created with the idea that as a younger person’s life goes on, they acquire a higher income. The more money you pay into the insurer, the higher your death benefit will be, as long as you die within the length of the policy.

This is ideal for new families or young people in general who will have their full working life ahead of them and the ability to pay the increasing premiums as they succeed.

However, the future is unexpected, and if you can’t afford to pay the premiums down the line, your investment will be for naught.

Decreasing

Like increasing, decreasing term was invented with life’s varying needs in mind. This policy was created because, as your life goes on, your children and dependents will require less of you financially as they develop their own lives.

Every year that you hold the policy, your premiums and death benefit will decrease at a predetermined rate.

This is a good idea if you’re expecting you won’t require or be able to afford as much coverage as time goes on. If your beneficiaries will be well developed and lack as much coverage, this might be worth considering to save you on future bills.

Speaking of future bills, however, if you leave behind a major medical bill or don’t have enough to cover your final expenses, your beneficiaries may have to pay out of their pockets.

Renewable

Insurability is the risk the insurer takes on that you will die before the end of your policy. Normally, every time you renew your policy, your insurability is worse, and you have to pay that much more for coverage.

With a renewable term policy, you can renew your policy every time the term runs out without having to prove insurability. You will still face a predetermined increase, but it would likely be nothing like if you had to prove your insurability again.

This is ideal for those who have a family with a bad medical history. If your health takes a turn for the worse, you’ll be grateful you don’t have to pay twice or three times as much as your previous rate.

This plan is much more affordable in the long run compared to buying multiple level term policies in succession.

The option to renew your term is available until a certain age, at which point you will be unable to get further coverage.

Convertible

A convertible term policy allows for the option to convert to a whole life policy as long as premiums are paid on time and the conditions are met. You pay a level premium and get a level death benefit for the length of your term policy. Like renewable, you won’t have to prove your insurability if you choose to move to a whole life policy.

This policy offers a little bit of everything for those who like to keep their options open.

Another benefit of this plan is that you will pay the whole life rates you qualified for when you started the term policy.

Those that are new to planning for their financial future may find the options appealing as they learn more about what they need.

Whole Life Basics

A whole life policy gives you the lifetime assurance that your family’s financial needs will be covered no matter when you pass away.

What is whole life?

Simply put, a whole life policy covers your whole life. From the day you start your policy until the day you die, you will have coverage as long as you pay your premiums.

Also available is the option to earn a return on your investment with the ability to accrue cash value.

Cash value is when a portion of your premiums are paid into a savings account that can be borrowed against, used to pay premiums, or even withdrawn if you decide to cancel your policy.

Even those who have planned for their retirement may face unexpected bills and costs. Some whole life policies invest your cash value for you to give you the option to accrue further wealth that you can use for these surprise expenses. At the very least, it can be used to cover your premiums so you may live out your golden years without the hassle of keeping up with the bill.

If not used, the cash value will be used to cover any fees with the remaining amount added to your death benefit.

If you surrender your policy before you die, fees and taxes will be taken out of the cash value before it’s given to you. This is considered to be a huge loss of your investment and should only be considered as a last option or in case of an emergency.

You’ll have level premiums and a level death benefit for the length of your policy, as long as you pay your premiums on time.

Who Should Consider Whole Life

Whole life has always been a popular policy because of the option to insure your entire life, and the ability to invest and grow cash value.

Young adults that have their whole professional lives ahead of them to pay the premiums and accrue value will undoubtedly benefit the most from this policy.

Purchasing a whole life policy as a new parent gives you the security of never having to worry about if your family’s future will be in danger after you pass.

Investors may find the ability to withdraw accrued and invested cash value during retirement especially appealing.

Business owners, much like with term, will find the whole life death benefit very useful in keeping their business going after they’re gone. The accrued cash value can also be used to cover any of the large expenses that always seem to come up.

Those who provide the most for their family — the breadwinner — may find the accrued cash value that is added to the death benefit even more appealing. After all, the more coverage that your family has from your policy, the better you’ll sleep at night.

But really, anyone can benefit from securing their whole life. With the option of gathering additional wealth, it’s hard to pass up.

Types of Whole Life

From 1940 until 1970, whole life insurance was the most popular form of policy in the United States. It was so popular, in fact, that it separated into new versions around the 1980s. These policies allow for further customization so you get the most out of your policy.

Traditional

A base whole life policy offers you a guaranteed premium and death benefit with the ability to accrue cash value from part of your premiums. This cash value is deposited into a savings account and may even be invested on your behalf.

This is the simplest form of a permanent life insurance policy. As long as you pay your premiums on time, you’ll gather wealth while still making sure your family is covered no matter when you pass away.

This policy is ideal for younger people who have their whole lives to pay the premiums and get the most out of their investment.

Universal

Universal life insurance offers flexibility on your policy that’s not typical of a basic whole life policy. With universal, you have the option to increase or decrease your coverage as long as certain conditions are met.

You also can choose when to pay your premiums within certain limits.

This policy is great for those who have or expect a lot of financial obligations. If you expect that you’ll have to stop paying premiums or that you’ll need more coverage when you can afford it, you should definitely consider this policy.

There are also two subtypes available in a universal policy:

  • Indexed 
  • Guaranteed 

With an indexed universal policy, your cash value will be invested in an equity index that’s determined every month. This increase is independent of the stock market and is guaranteed to always be a positive percentage.

If you find yourself to be more indecisive, a guaranteed universal policy is a little bit of both term and whole life policies. It is more affordable than a base whole life policy while still covering your whole life. It is more affordable because it doesn’t accrue any cash value.

An indexed policy is ideal for those who love the idea of coverage for their whole life while seeing a positive investment in the cash value. A guaranteed policy would be more ideal for those who don’t see the need for the cash value but find the whole life coverage appealing.

Variable

With a variable whole life policy, your cash value is invested just like with an indexed universal policy. However, with variable, your cash value is invested in sub-accounts that act like a mutual fund in that they’re affected by the stock market.

This allows for the potential of more growth than an indexed universal policy but also allows for the option of loss if the stock market takes a turn for the worse.

This policy is great for those who won’t depend heavily on the cash value, and don’t mind the extra risk.

Like its parent category, a variable universal life insurance policy allows for mutual-fund-type investment options available in a variable policy and the flexibility in premiums found in universal. This policy is ideal for anyone who doesn’t want to pay their premiums when they want and doesn’t mind the potential risk of the invested cash value.

This invested value can be used to pay your premiums so you don’t have to worry about them after the first couple of years.

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Term & Whole Life Riders

If you like the idea of a policy, but wish you could just customize it a little more, then a rider might be something to consider.

While they come at an additional cost, these added benefits may add security to your specific needs.

Term Life Riders

Because of the rigidness of the term life policies, it’s understandable that policyholders would want to customize their coverage and options.

  • Child Protection – While unthinkable, this rider offers coverage in case anything happens to one of your children before the end of the term.
  • Conversion Option – If you don’t have a convertible policy, this allows for the option to convert to a whole life policy as long as you pay your premiums on time and meet the conditions.
  • Return of Premium – This rider will pay you back a portion of your premiums if you outlive your term policy.

Most term riders are based around making sure you have the coverage you want and the ability to keep your options open with the return of premiums and conversion.

Whole Life Riders

When considering a contract that you’ll have for the rest of your life, you’ll want to make sure that you have all the coverage and customization that you want.

  • Terminal Illness – If you become gravely injured or terminally ill, this rider allows you to get a portion of your death benefit early to help with whatever you need.
  • Disability – If you become hurt or unable to work for a period of time, your insurer will pay you a predetermined amount to help get you back on your feet.
  • Family Income – With this rider, your family will receive the death benefit paid out every month to better help with the transition after you pass.
  • Waiver of Premium – If you become seriously hurt before a certain age, the insurer won’t make you pay any further premiums.

The whole life riders are more focused on circumstances that may arise, as opposed to cost and conversion with the term.

Shopping for Term & Whole Life Insurance

When shopping around for a life insurance policy, having the right information will be your best tool. Knowing what you want is the key to not overpaying or getting taken for a ride.

What to Consider

Before ever diving into what whole and term and their individual subtypes mean for your life, you’ll need to understand what you’re willing to pay and how long you want the coverage for.

Cost

For base whole and term life, the premiums and death benefits are level for the length of the policy. This means that you can expect to pay the same amount every month for the length of your policy.

Those who want to choose when to pay their premiums and adjust their death benefit will find a universal policy to be the better choice.

The cost is determined by factors such as:

  • Age – It shouldn’t come as a shock to most, but the older you get, the more likely you’ll find yourself falling ill or just falling in general. The younger you purchase life insurance, the cheaper it’ll be.
  • Gender – Women have the upper hand when it comes to life expectancy. On average, women live five to 10 years longer than their male counterparts in most countries.
  • Health – If you have any pre-existing conditions or medications, it could affect your rates, so be sure to take care of your mental and physical health.
  • Tobacco/Nicotine Use – Time to put away the cancer sticks. Life insurers will jack your prices sky-high if they find that you’re a smoker. With the information coming out regarding e-cigarettes and their effect on your health, insurers may soon classify vapers as smokers or place them in a new category at even higher rates.
  • Occupation – Occupations with higher mortality rates will hurt your premiums. The more likely you are to collect the death benefit, the more you will have to pay to cover that risk. According to USA Today, the most dangerous jobs are fishers, loggers, and airplane pilots.
  • Hobbies – Risk-taking behavior and extreme sports could cause your rates to go up, depending on how frequently you do the activity.

As mentioned above, if you want additional coverage, you can add riders at an additional cost to ensure that you have the coverage you need.

While this can seem like a lot, life insurance is very affordable as long as you start your policy while you’re young and healthy.

Length of Term

Deciding whether you want temporary or permanent life insurance depends on several factors unique to your life.

Term life is great if you want to cover a period in your life where you will need extra coverage. This is a good idea if you have growing children or a business that would need extra help if you passed.

Whole life covers the rest of your days as long as you pay your premiums. This can be a benefit because you will never have to prove your insurability again. Those who want to provide an inheritance or use the cash value in retirement will benefit the most from this policy.

Which one you need depends mostly on your needs and preferences. From there you can look at the subtypes and riders to further get an idea of what you’re looking for.

Which should you buy?

Deciding on a plan means deciding on what’s best for you and your loved one’s future.

This video from Allstate will address the differences between the two types of policies and how they can each benefit you.

Premiums are a lot higher for whole life policies because a portion goes into a cash value savings account, which should be considered.

The cost is also reflected by your demographics, hobbies, and medical history. Depending on your life, your financial advisor may suggest different policies for you depending on these factors.

For example, here is a comparison of a 10-year term policy difference for smokers and non-smokers from Illinois Mutual Life Insurance:

Age$100,000/10-Year: Non-Smoker, Male$100,000/10-Year: Non-Smoker, Female
25$10.12$9.77
30$10.82$10.30
35$11.62$10.65
40$12.76$11.53
45$14.87$13.55
50$18.30$16.63
55$24.90$20.86
60$36.61$26.58
65$62.83$39.86

As you can see, the rates for non-smokers are very affordable even later in life.

Age$100,000/10-Year: Smoker, Male$100,000/10-Year: Smoker, Female
25$17.16$16.02
30$21.56$19.18
35$26.84$25.43
40$33.88$31.50
45$50.42$47.87
50$76.91$75.33
55$116.25$120.65
60$178.82$171.07
65$256.17$225.98

These rates can get less affordable. It is easy to see by just comparing age, gender, and tobacco use, how significantly different the rates can be. It’s for this reason that you should speak with a financial adviser to find what policy works best for your individual situation.

Insurers take smoking so seriously, in fact, that even smoking the occasional cigar can classify you as one.

Should you buy both?

While one policy will cover most needs, deciding whether to buy multiple policies depends on what you’re looking to gain.

That being said, owning more than one policy opens new opportunities for wealth and protection.

Additional Considerations

Deciding whether to buy multiple policies depends heavily on what you’re looking for.

Coverage Amount

If you’re looking for extra coverage, you can buy a term policy in addition to your whole life policy.

This can also be achieved by laddering multiple term life policies. By buying a 30-year term policy, a 20-year policy a few years later, and a 10-year policy a year after that, you can achieve your desired coverage amount.

As an Investment

If you have a term policy but are interested in an investment opportunity with extra coverage, then purchasing an additional whole life policy with an investment aspect might appeal to your situation.

Pros & Cons

As with all things, there are positives and negatives to both types of life insurance.

Type of Life InsuranceProsCons
TermHassle-free

Guaranteed level premiums and death benefit
Renewed at an increased rate

Very little to no potential room for investment
WholeCovers you for your entire life without you having to prove insurability

Ability to accumulate additional wealth through cash value and investment options
Costs more than term

Subject to more fees and complications than term life

A term policy is a hassle-free option for an affordable and safe death benefit. While a whole life policy is more complicated, it does add the option for added value as time goes on.

The Bottom Line

If you’re alive and reading this today, you and your loved ones will benefit from a life insurance policy. That being said, each policy is structured to better suit certain lifestyles.

By going in with the knowledge of what you want and what you don’t, you’ll be ready to get a great policy at a price you can afford.

Ready to begin looking? Use our FREE quote tool to find your best rates.

References:
  1. https://www.acli.com/Consumer-Info/Life-Insurance/Types-of-Life-Insurance
  2. https://lifehappens.org/insurance-overview/term-insurance/
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  14. https://www.dfs.ny.gov/consumer/cli_h_cost.htm
  15. https://ourworldindata.org/why-do-women-live-longer-than-men
  16. https://www.mentalhealth.org.uk/publications/how-to-mental-health
  17. https://www.reuters.com/article/us-vaping-insurance-analysis/could-life-insurance-go-up-in-smoke-for-some-vapers-idUSKBN1Y61KL
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  19. https://www.usatoday.com/story/money/2019/01/08/most-dangerous-jobs-us-where-fatal-injuries-happen-most-often/38832907/
  20. href=”https://www.aaalife.com/life-resources/you-may-have-or-need-more-than-one-life-insurance-policy.html
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