It can be overwhelming to navigate all the insurance options available, especially if you’re a millennial juggling multiple financial priorities. One crucial decision you have to make is choosing between term and whole life insurance.
Knowing the differences and advantages of each can help you select a life insurance policy that aligns with your long-term goals. In this blog, we aim to compare term versus whole life insurance, revealing their pros and cons to help you make sense of your coverage choices.
What Is Whole Life Insurance?
Whole life insurance is a type of insurance that will never expire as long as you continue to pay for it. This keeps you insured for the rest of your life.
This form of permanent insurance includes a cash value account that can grow tax-free. You can also withdraw from or borrow against its savings component.
Whole life insurance policies are typically more expensive than term life at the beginning and mature a bit later in life, typically around 90, 100, or even 120 years old. Plus, they come with a cash value component you can eventually cash in by surrendering the policy.
What is Term Life Insurance?
As the name implies, term life insurance covers the insured for a specified period (or “term”). It does not accrue cash value but is usually more affordable at the onset of the policy.
Like whole life insurance, term life pays out to your beneficiaries if you pass away within the coverage period (typically 10, 20, or 30 years). However, term life insurance offers no savings component you can enjoy if you outlive the coverage term.
Even so, term life insurance can be extended through a renewable term clause. This is possible as long as certain conditions are met (e.g., up-to-date premium payments). However, there are some cases where the policyholder can no longer be insured because of a drastic change in their life circumstances, like when their health deteriorates.
Most of the time, the death benefit and insurance premiums stay the same throughout the coverage period (called “level term”). The only exception is the less common decreasing term life policy, which has a declining death benefit value.
Term vs Whole Life Insurance: Which Is Better?
No matter how often you compare term life insurance versus whole life insurance, chances are, you will not get any clear winner. Why? Because there’s no one-size-fits-all when it comes to life insurance.
Yes, both offer payouts within their coverage period in case of the insured’s demise, but each has certain nuances that may affect your long-term goals.
In this section, you’ll learn the key differences between whole life and term life, as well as their respective benefits and drawbacks.
Term Life Insurance: Pros and Cons
As established earlier, term life insurance is active for a limited time. To ensure that you get the most out of it, you must match your term coverage with the period of the financial obligation you’re covering.
For instance, new parents may opt for a 20-year policy to ensure that their child will have a guaranteed income in case their mother or father passes away. This term matches the number of years when children financially rely on their parents.
Here’s an overview of all the pros and cons of term life insurance:
Pros
Less expensive at the onset.
Available in flexible premium and coverage terms.
Simple and easy to understand.
Cons
Offers temporary coverage only.
Higher cost upon renewal.
Cannot be renewed past 85 years old.
No cash value or dividends.
Whole Life Insurance: Pros and Cons
Whole life insurance is more straightforward than term life because the premiums remain the same throughout. Its cash value also grows at a fixed rate, serving as a more predictable form of investment for the future.
Besides a guaranteed death benefit, you can also take out a loan against your whole life insurance cash value. However, be aware that any outstanding balances from loans and withdrawals shall be deducted from the final death benefit your beneficiaries will receive in case of your demise.
Here’s a rundown of the key advantages and disadvantages of whole life policies to help you make an informed decision:
Pros
Offers full life coverage, regardless of future changes in health.
Fixed premium costs.
Less expensive later in life.
Can provide growth opportunities for cash value.
Savings component can be borrowed against or withdrawn (may come with tax implications).
Cons
More expensive at the beginning compared to term life.
May come with surrender charges should the policy lapse during the first few years.
Outstanding loan balances can be deducted from the death benefit.
Sound Choices for Your Future
Whole life insurance and term life insurance provide various advantages suited to different people. This guide helps you understand their key differences and the pros and cons they present so you can better weigh your options.
At Hayah, we take our mission to transform your insurance experience very seriously. Whether you choose a simple life insurance policy or decide to customise one for yourself, your family, or your company, we hope this knowledge empowers you to make sound choices for your future.