There is a lot of misinformation out there when it comes to the debate between term life vs whole life. It can be a very polarizing subject. Many financial entertainers, specifically Dave Ramsey and Suze Orman, are proponents of term life and disparage whole life every chance they get.
However, when searching for the right life insurance policy it is important to know what type of life insurance fits your need. Everyone is different and not everyone shares the same reasons for life insurance. As a result, we hope to provide our visitors with whole life vs term life pros and cons, so that you can make an informed decision based on your unique life circumstances.
However, what sets us apart from the competition is knowing which specific company to recommend based on a client’s unique health and lifestyle profile. It is by knowing each unique company’s niche that we help our clients find the lowest permanent life and term life insurance rates.
Term Life Insurance vs Permanent Life Insurance: What is the Difference?
Whole Life, Indexed Universal Life, Variable Universal Life, Guaranteed Universal Life Insurance or Term Life Insurance — with so many options, how do I know which product and policy to choose?
The intent of this article is to help shed some light on the different types of life insurance policies available. With so many options available it is easy to get confused. Often, a confused person is also a person who fails to act. But if you are considering life insurance time may be of the essence. Hopefully this article will help you make a decision of what the best product is—for you—based on your unique need.
What is the difference between term life insurance and whole life insurance?
Let’s start with…
First, let’s define what term life insurance is. Term life is a policy that covers an individual (the insured) for a set period of time. Typically, term life is available in 10, 15, 20 and 30 year term lengths. However, 1, 5 and 25 year terms are also available.
Term life lasts for the term of the policy. Once the policy expires, the insured may be able to renew the policy on an annual basis. Generally, the policy premium will increase dramatically once the policy expires, although some carriers allow the policy to renew with little change to the premium, choosing to instead drop the death benefit if the insured desires to continue to pay premiums.
Two important types of term life are level and convertible term.
Level term life insurance is coverage that has the premium and death benefit remain the same for the duration of the term. One problem is there are companies that don’t make it clear if the term policy they offer is really “level” as we have defined it or if the premium stays the same but the death benefit DECREASES. Another way companies can pull a fast one is to say the death benefit is level, but the premium INCREASES every five years.
Convertible term life insurance is a policy that can be converted to permanent coverage. Check the fine print on the policy but most of your typical term policies that allow your to convert will require that you do so before the term expires or by age 70. If you chose to elect the option to convert the policy you can choose permanent coverage based on the product offering of the company you are with. If you don’t like your options, you can also look into a 1035 like exchange.
Next, let’s take a look at…
First, we will start defining permanent life insurance. Permanent life, also known as cash value life insurance, is coverage that lasts your entire life and accumulates cash value. Two variations of permanent coverage are whole life and universal life.
Each permanent type of insurance offers different pros and cons, which we will attempt to address below.
Two basic differences between whole life and term life is time and cost.
As the name implies, a term life insurance policy is only valid for a predetermined period of time, whereas a whole life insurance policy is valid for an entire lifespan—no matter how long you live. With that in mind, the reality is a bit more complex.
Whole life costs more than term life, at least at first. However, if you bought whole life at age 40, you will pay less for that permanent policy than you would for a term life policy at age 65. Careful planning is necessary with permanent life insurance. But the advantage of locking into a permanent policy while you are younger is you will always pay that lower premium and you will always have life insurance that builds cash value.
Pros and Cons of Term Life Insurance
Some term life pros and cons are as follows:
- cheap life insurance, at least initially.
- To replace lost wages if a primary wage earner dies
- To cover a mortgage so a home can be paid off if one spouse dies prematurely
- Using life insurance to secure an SBA Loan or Bank Loan
- Securing protection for a divorce decree
- Life insurance for a key employee
- convertible to permanent coverage if needed
- many riders that act as living benefits to help you out financially if you are diagnosed terminally ill, chronically ill, or critically ill
Cons of Term Life Insurance
Term life insurance does not accumulate cash value and it has an end date. If either of those are important to you, then cash value whole life insurance is the way to go.
However, many financial entertainers (think Dave Ramsey and Suze Orman) will point out that when you buy a term life policy, you actually wind up saving money due to lower term life rates. You can use the money you’ve saved and invest it, often providing a higher rate of return than any cash accumulation from your whole life policy.
The one problem with this way of thinking is that it assumes someone will actually invest the difference saved by choosing term over whole life. In reality, most people find other ways to spend the savings, such as on cable TV or Netflix. However, the strategy of investing the difference is a sound one, if you are one of the rare, more disciplined savers. If not, consider the pros of whole life insurance.
Pros and Cons of Whole Life Insurance
When you decide whether to buy a term or whole life insurance policy, you need to consider your motivation for choosing between the two options. Delving into whole and term life pros and cons can yield surprising results.
For instance, cash value whole life insurance, or some other type of permanent coverage (see below), is typically the best choice for the following:
- Using Life Insurance for Estate Planning
- Using Life Insurance for Business Succession Planning
- Using Life Insurance to Provide for a Special Needs Child
- Using Life Insurance for Charitable Purposes.
- Using Life Insurance Cash Value policy loans for:
- Investing in cash flow passive income assets such as: real estate, dividend stocks, oil and gas, etc…
- Paying off high interest debt such as: credit cards, student loans
- Funding a new business venture
- More expensive than term
- Takes a more disciplined financial approach
Cash value whole life insurance initially costs more, and it’s not always (although sometimes it is) necessary or the best choice. The average woman in the United States lives to be around 81 years whereas the average male lives to be about 77. It’s quite possible to get a term life insurance policy that covers you until your particular life expectancy if all you are concerned about is a death benefit.
And here is the problem: no one knows how long they will live and using averages to determine your life expectancy is not always the best choice.
Using Term Life Insurance as Leverage
When considering the pros and cons of term and whole life, one of the major pros of term life insurance is that it offers more bang for your buck, see our best term life insurance rates by age chart.
For example, a healthy 40 year old male will pay around $30 a month for a $500,000 policy with a 20 year term. In contrast, a whole life policy might be as much as seven times that amount, or $210 a month.
Often people will decide to go with less coverage since they really want a permanent policy. However, $50,000 or $100,000 is not going to stretch very far. As a result, if the insured dies, the coverage barely pays any remaining bills and funeral expenses.
If you have limited funds available but you want the most coverage possible, choosing term vs permanent life makes sense. That way, if you die prematurely, the term policy will provide your family with the funds needed to move on and not be left desolate.
What is the difference between various types of “universal life” policies?
No pros and cons between term and whole life is complete without considering Universal Life. Universal Life Insurance is a form of permanent life insurance. There are three main types of universal life insurance policies:
All of these types of universal life insurance can be considered more than just a life insurance policy, but also accumulate cash value. Universal life insurance policies normally allow for a flexible payment plan, meaning that you can control the premium and death benefit, to some extent.
This is a permanent life insurance policy that will pay out no matter when you die.
Indexed Universal Life Insurance has two parts: life insurance and cash value. You pay premiums, then subtract the policy charges, and then add the value depending on the insurance company’s fixed interest offered or the crediting from an index. This allows you to possibly get a bump up in your cash value, but not always.
The downside of an indexed universal life insurance policy is that it can be confusing. The good news is we have a few articles that focus on the benefits of Indexed Universal Life to help shed some light on this beneficial (for the right person) product:
- Indexed Universal Life Insurance Pros and Cons
- Five Incredible Elements of Indexed Universal Life
- The Problem with Indexed Universal Life—Debunked
Here is a snapshot of Indexed Universal Life (IUL)
You do not directly invest in the stock market. Instead, your cash is allocated to various accounts. You can choose a fixed account that usually has a guaranteed floor of 2% and is based on the company’s declared interest rate.
Another option that you can put your cash into is an indexed account, which typically follow the larger equity markets such as the S&P 500, NASDAQ 100, EURO STOXX 50, DJIA, or MSCI Emerging Markets. These indexed accounts have a cap and a floor.
The cap is the maximum gains you will see in that particular account. Normal caps right now range from 10-15%. You also have a floor, which is your guaranteed lowest return. Floors are usually 0-1%. The floor protects your cash value from negative market moves. If the market performs really well, you will only participate in the gains up to your cap. Some indexed accounts are uncapped, but they have a lower participation rate.
Your participation rate is how much your indexed account will participate in the gain of the market. For example, if the index you choose tracks the S&P 500 and the index increases 10% and your participation rate is 90%, your estimated credited rate would be 9% (90% times 10% gain). Participation rates generally hover around 90 – 100% although some may be higher or lower.
The indexed account can be credited daily, monthly or annually. The period that the indexed account is credited is one year. If the indexed account your policy is tracking has a negative year, your annual reset will be at the new value of the index. So you may have a 0% return but since you are in at a lower point you may have a better year following the decline. Plus, your account did not lose money which means you don’t have to recoup losses as you would if you invested directly into the stock market.
Like an indexed universal life policy, a variable universal life insurance policy is also made up of life insurance and fund allocation. It is different, however, because you put the money in various account funds, kind of like mutual funds. The policy owner (i.e. you) makes the financial decisions of where to put that money.
So, if you aren’t a regular investor this can wind up being a lot of work, and if you don’t make smart choices on where to put your policy’s money, then your policy value can be severely harmed, which could lead to your policy lapsing.
Variable Life Insurance often has “hidden” fees that make it a poor choice for anyone but the seasoned investor. While there may be some good options out there for the more astute investor, most people should steer clear of VULs.
The difference between guaranteed universal life insurance and indexed or variable universal life, is, that as the name suggests, there are some guarantees. This policy guarantees a lot of positive things:
- You can set premiums that last a lifetime—even if you live to 105 and beyond
- There will be a guaranteed death benefit—again, no matter how long you live (note that there are options for GULs: to age 90, 95, 100, and 121. If you choose an option other than to 121 you run the risk of outliving your policy).
- There is much less investor volatility
- It’s a “safe” insurance product (but see the note in #2)
It may sound good so far, but there are some cons to guaranteed universal life. Unlike the variable universal life policy, you won’t be able to set your own payment schedule. Failure to make timely payments may disrupt your guaranteed premium.
Also, many guaranteed universal life policies do not have, or have limited cash value—something that people look forward to with permanent life insurance. But while you are not accumulating cash value you are also paying a lower premium for a permanent policy—this is often worth the exchange.
So which policy is right for me?
Assessing the pros and cons of whole life versus term life insurance can be daunting. Permanent policies, such as universal life or whole life policies sound enticing and safe since they last, well, forever.
But you need to ask yourself is whether the higher premiums are going to be worth it. If you think so, then you need to decide how much risk you want to take, and how involved in the choosing of where your money is placed you want to be. These things will help you determine if you should buy a term, whole, indexed, variable or guaranteed universal life insurance policy.
You can always convert down the road
When deciding on the pros and cons of term life insurance versus whole life insurance, one thing to be aware of is that many term life insurance policies have a conversion option. This allows the policy to be converted to a permanent policy sometime typically before age 70 or before the term expires. You can convert all or a portion of the policy (ex. $500,000 term policy; you can convert all or as low as $100,000).
And the best part is that the policy is converted with no proof of insurability, i.e. no exam or background check. Instead, the policy converts at the rate class you originally qualified at.
Therefore, if you choose term as your initial insurance policy, and you become sick due to some serious illness such as cancer, you can convert the existing term policy to a permanent policy and keep it the rest of your life.
No Exam Universal Life Insurance
There are no exam permanent life insurance policies available. Therefore, if you do not want an exam but desire permanent coverage, consider purchasing a no medical exam universal life insurance policy.
And for those of you on the fence, trying to determine if you should go with an exam versus no exam policy, consider the following: If you are concerned what might turn up in your blood or urine sample, such as high blood pressure, cholesterol, diabetes, etc…, go with the no exam policy.
The idea is to choose simplified issue life insurance and lock into coverage and then take the life insurance medical exam. This way, if you find out your not as healthy as you think (or as healthy as you thought you were), then at least you locked into coverage.
The worst thing is to find out you are postponed or declined coverage due to some asymptomatic latent health issue.
How can I find out more information about different life insurance policies?
Making any major purchase can be difficult, and often requires expert advice. We are here to help you make wise life insurance policy decisions.
We walk you through the entire process, and help you assess your own situation so that you can decide on a life insurance policy that’s right for you.
We work with clients wanting term, whole and universal life policies. Every individual’s and family’s needs are different.
At TermLife2Go, we understand that and we help you figure out what’s right—for you.
If you are interested in knowing more about your term life insurance or a whole life insurance options just give us a call or feel free to visit our Life Insurance Quotes page and see what we can do for you!
Thank you for reading our article, Term Life Insurance versus Permanent Life Insurance: What is the Difference? Please leave any questions or comments below.