Term vs Whole Life Insurance Comparison Calculators
Let the Battle Begin!
Term Life vs Whole Life Introduction
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 type of 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.
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?
One goal of this article is to help shed some light on the different types of life insurance policies available. With so many options out there 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 now is the time to act. Hopefully this article will help spur you on to make a decision of what the best product is—for you—based on your unique needs, goals and objectives.
What is the difference between term life insurance and whole life insurance?
Let’s start with…a life insurance comparison chart.
|Features||Term Life||Participating Whole Life||Guaranteed Universal Life||Indexed Universal Life||Variable Universal Life|
|Duration||1, 5, 10, 15, 20, 25 and 30 year (35 Year ROP)||Lifetime, 7 Pay, 10 Pay, 20 Pay, Pay to Age 65, Pay to age 100||to age 90, 95, 100 and 121||Lifetime||Lifetime|
|Guaranteed Death Benefit||Yes, as long as premiums paid||Yes, as long as premiums paid||Yes, as long as premiums paid||Yes, as long as premiums paid||Yes, as long as premiums paid|
|Guaranteed Level Premium||Fixed for level term life, renews annually upon expiry||Fixed for the policy’s payment period; can be shorter if you choose limited pay||Yes||No, premium can be higher or lower depending on performance and owner’s preference.||No, premium can be higher or lower depending on performance and owner’s preference.|
|Guaranteed Cash Value||No (Some ROP offer cash value)||Yes, cash value grows based on interest and dividends.||Yes, although it is small since focus is on death benefit not cash accumulation.||No, linked to movement of selected stock index or fixed account.||No, linked to movement of selected variable sub-accounts or fixed account.|
|Policy Loans and Withdrawals||No||Yes, tax free policy loans and tax free withdrawals up to basis in the policy.||Yes, tax free policy loans and tax free withdrawals up to basis in the policy.||Yes, tax free policy loans and tax free withdrawals up to basis in the policy.||Yes, tax free policy loans and tax free withdrawals up to basis in the policy.|
|Dividends||No||Yes, can be used for paid up additions, cash out, pay premiums, etc||No||No||No|
|Does Death Benefit Increase?||No, unless add coverage requiring medical underwriting.||Yes, cash value and dividends can increase death benefit.||No, unless add coverage requiring medical underwriting.||Yes, option for increasing death benefit, fixed benefit, or ROP.||Yes, option for increasing death benefit, fixed benefit, or ROP.|
|Other||Initially the lowest premiums of all life insurance policies.||Excellent retirement vehicle due to growing death benefit and cash value.||You may outlive if you choose other than to age 121. Cash value is limited since focus is on permanent death benefit.||Potential higher returns than participating whole. Has maximum cap limiting growth and guaranteed floor limiting loss (0-1%).||Unlimited potential gains and losses based on underlying asset class.|
WHAT IS TERM LIFE INSURANCE?
First, let’s define what term life insurance is.
Term life insurance DEFINITION: a policy that covers you (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. The policy between you and the carrier lasts for the term of the policy. Once the policy expires, you 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.
Three 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.
Make sure you know which type of term you have and that the policy specifies both a level premium and a level death benefit.
Convertible term life insurance coverage 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 life insurance company you are with. If you don’t like your options, you can also look into a 1035 like exchange.
Finally, the third type is annual renewable term (ART). ART is renewable every year. It is beneficial for anyone who need coverage but only for a short time (less than 5 years).
You can head over to our article that allows you to view different charts by age and compare term life insurance quotes to get an idea what a policy would cost.
Next, let’s take a look at…
PERMANENT LIFE Insurance
First, we will start by defining permanent life insurance.
Permanent life insurance DEFINITION: permanent life, also known as cash value life insurance, is coverage that lasts your entire life and accumulates cash value. Upon your death, the insurer pays your beneficiary a lump sum income tax free death benefit. Two variations of permanent coverage are whole life and universal life.
Each permanent type of insurance coverage 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 coverage.
But the advantage of locking into a whole life policy while you are younger is you will always pay that lower premium, you will always have life insurance that builds cash value and you will always have a death benefit.
Pros and Cons of Term Life Insurance
Some term life pros and cons are as follows:
Pros of Term Life Insurance
- 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. Your premium payment is buying “pure” death benefit coverage.
You term policy has an end date. Once the term expires you can renew to age 90 or 95, but the cost of insurance goes up dramatically since you are getting older.
Buy Term and Invest the Rest
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.
A problem with this line of reasoning 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 may be a sound one, if you are one of the rare, more disciplined savers.
Just know that the high returns in mutual funds touted by the advocates of “buy term and invest the rest” are inflated. When you take into account the likelihood of another 50% haircut in the next market crash and whole life and indexed universal life start looking more and more attractive as a “safe bucket” to hold you cash waiting for the next investment opportunity.
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.
WHAT IS WHOLE LIFE Insurance
First, let’s define whole life. Whole Life Insurance DEFINITION: a type of permanent life insurance that offers guaranteed cash value growth, guaranteed fixed premiums and a guaranteed death benefit payout. Upon the death of the insured, the insurer pays an income tax free lump sum death benefit to the beneficiary. Cash value can be accessed tax free through withdrawals up to your basis or via life insurance loans.
For our purposes in this article we are not only talking about whole life, but more specific, participating whole life insurance.
Participating Whole Life Insurance DEFINITION: whole life policy that provides annual tax free dividend payments based on the performance of the insurance company. The greater the insurer’s income, the greater the potential dividend payment to participating policyholders.
Pros of Whole Life insurance
Besides the guarantees listed above, whole life and cash value permanent life insurance also has tax favored status. Policy loans are tax free and withdrawals are tax free up to your basis. The death benefit is paid to your beneficiary tax free. The cash value in your policy grows tax deferred. Policy loans do not affect your credit score. Cash value is not counted as an asset when applying for a FAFSA student loan.
For these reasons and more, permanent life insurance is a great option to use as a home base for your cash. It is liquid so you can access it anytime for any reason.
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:
Cons of Whole Life Insurance
- Your whole life insurance premium will be more expensive than term; at least initially
- 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. And some people do care about cash value accumulation.
But when you die your beneficiary does not get the cash value
One knock against whole life insurance as an investment vehicle is that the cash value in your policy does not go to your beneficiary when you die. But here is the thing, what these financial “experts” fail to tell you is the cash value in your policy is what keeps your cost of insurance down.
In a properly designed policy built for maximum cash accumulation, as your cash value builds in the policy your policy is becoming more efficient, meaning the more money you put in the higher return you are getting.
The longer you have your policy in force, the greater your cash value grows, the larger your death benefit becomes. See that is the key that financial entertainers don’t talk about. You cash value is INCREASING your death benefit.
Here is an analogy using Real Estate.
When you buy a home you are usually using other people’s money, i.e. the bank. You home has very little equity. And if you use a VA loan, you may have zero equity in your home. So if you die right after you buy your home what do your beneficiaries get? An asset that has zero value and probably a big headache if they have to probate your estate.
Now as time passes, your home gains equity due to inflation and paying your mortgage. Assuming you don’t tap into your home equity, your home has “cash value” in it called equity. You have your home market value and your equity. When you die, what do your beneficiaries get?
They get your equity. But they don’t get your equity plus the home value. And yet financial planners still say your home is a great investment. But compare it to cash value life insurance.
With cash value life insurance you get the equity in the home during your life via withdrawals and policy loans and you don’t have to be approved, have your credit run, or qualify at all. It is your money by rights through contract law.
And your policy is gaining value through interest and dividends. And if you are opting for paid up additions, the interest and dividends are giving you larger and larger returns, which buys you more and more paid up life insurance death benefit, which in turn gets larger returns and dividends, and on and on and on…
So this limited analogy shows that even though your beneficiary does not get the cash value, they get the total death benefit. A death benefit that is growing over time as the cash value grows, blasting this argument against cash value life insurance into oblivion.
Using Term Life Insurance as Leverage
When considering the pros and cons of term vs whole life, one of the major pros of term life insurance is that it offers more bang for your buck, see our term life insurance rates chart. By implementing the concept of leverage into life insurance, term life allows you to use less money to get more death benefit coverage.
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 whole life insurance makes sense. That way, if you die prematurely, the lump sum death benefit paid by the insurer based on your term policy’s face amount will protect your family’s future with the funds needed to move on and not be left financially desolate.
Something to consider…
One option would be to choose convertible term life so you can convert to permanent coverage down the road once your financial house is in order.
Alternatively, you can add a term rider to your permanent coverage to increase your death benefit while you wait for your cash value to catch up.
What is the difference between various types of universal life insurance policies?
No pros and cons between term and permanent life is complete without considering Universal Life. Universal Life Insurance is a form of permanent coverage. 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 may 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 lower 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.
You can also change the way your death benefit is paid to help lower your premium or potentially build cash value faster. Typically, the death benefit is paid in a lump sum. However, by stretching out the death benefit to a series of payments over a set time frame. Another advantage is your beneficiary does not receive a lump sum payment that may act as a “blank check.”
Index Universal Life vs Whole Life
- Index universal life has the potential to grow your policy’s cash value faster than whole life. But with higher potential returns you sacrifice whole life guarantees.
- Whole life guarantees a fixed premium, cash value growth, and a permanent death benefit.
- Indexed universal life could theoretically not provide any growth. Since the interest in the policy is determined in part by the performance of the index it tracks, if the market has a series of negative years, your IUL policy may have negative growth due to policy costs and fees.
One way to make a determination on what permanent cash value policy is right for you would be to have a licensed advanced markets pro run some illustrations for you. Then you can pit whole life vs indexed universal life and see how the two compete head to head.
Like indexed universal life (IUL), variable universal life (VUL) insurance 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.
IUL vs VUL
- IULs are not an investment in the market; VULs use sub-accounts that directly invest in the market.
- IULs typically have a cap that limits gains; VULs have no cap and have unlimited potential gains.
- IULs have a floor, which provides a guaranteed interest rate, typically 0-1%; VULs have no guaranteed floor and you can have negative returns.
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.
GUL vs Whole Life
- GUL provides guaranteed protection and fixed premiums just like whole life.
- GUL does not have much cash value. It is focused primarily on the death benefit.
- Whole life, particularly participating whole life, can be structured so there is an increasing death benefit and cash value.
For more, please see our article covering our Top 10 Best Universal Life Insurance Companies.
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 today and see what we your trusted Termlife2Go life insurance agent can do for you!
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