Term vs Whole Life Insurance- What’s Best For You?

Category: Insurance

For the average individual, life insurance just isn’t the topic we talk about at the dining table, but it doesn’t change the fact that it’s one of the key elements to ensure that our wealth and hard work aren’t wasted. The premise of paying for the premiums on life insurance is to ensure our children are well off even when we’re gone. 

As for those who are keen on delving deeper into this topic, however, comes the debate of whether term life insurance is better, or whole life? Both of these are similar, yet their client’s desire for life is quite different. With that said, the goal of this piece is to help clear up the confusion and hopefully, help you make an informed decision. 

1. What is term life insurance?

By definition, a term life insurance covers you for a specified number of years and has no cash value associated with it. Because of this, the premiums are often lower when compared with whole life policies. However, it will still depend on the number of years you want coverage for. Here are the features of term life insurance: 

Benefits of term life insurance

  • Because the coverage lasts for a specified number of years instead of your entire life, the premium payments are usually fixed for this period. That means you won’t have to worry about inflation, as long as your income can cover it. 
  • What’s more, is that if you’ve outlived this period, this policy can easily be converted into a whole life policy. 
  • One more thing is that because there is no cash value accumulation for this, the premiums are generally much lower when compared to whole life insurance. 

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Cons of term life insurance

  • It may be quite a hassle to some because when you renew your policy or want to switch over to a whole life insurance, the company may request you to submit a physical exam all over again. 
  • Technically speaking, as you get older, the risk of your death gets higher, so with that thought, insurance companies may not renew your policy as you get further into retirement. Or, it may be limited to only a short number of years. 
  • As with that, the cost of the premiums may increase by a lot with each policy renewal. 

2. What is whole life insurance? 

Sometimes referred to as permanent insurance, whole life insurance combines your life insurance, as well as investments. The investment part of this insurance is called “cash value” and is placed in a different account known as a “cash value account”. 

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With whole life insurance, part of your monthly premium payment goes to the insurance coverage and the rest will go to an investment account. Think of this like a separate savings account that is managed by the insurance company but you have the right to withdraw any of those amounts plus interest if and when you’re in dire need of it. 

Benefits of whole life insurance

  • The most obvious is that this insurance lasts a lifetime. 
  • Secondly, you have the benefit of cash value accumulation. This can also be an extension of your emergency fund. For instance, if you’ve lost your job and couldn’t maintain the premiums, you can actually use the money in the cash value account to cover it until you get another job. 

Cons of whole life insurance

  • As you can probably tell, the combination of life insurance and cash value adds up to a higher premium. 
  • Although the cash value part may sound like a huge advantage, you’re actually better off investing in other types of products such as stocks, index funds, ETFs, or REITs. 

3. So, should you get term or whole life insurance? 

When you contemplate this question, it really goes back to the real purpose you’re purchasing the product. This is just a tool that protects your loved ones and shields your investments and assets in the event of your passing. It is not designed to be a money-making scheme. 

Ideally, it’s better to prioritise getting out of debt, bulking up on savings and investments, then only think about buying life insurance. But if you still want peace of mind, you can always buy a smaller coverage and upgrade later on. You don’t want to put money into a life insurance policy if it’s not necessary, but it’s always good to be prepared for the rainy days. 

If you’re still unsure of which one to get, it may be worth it to speak to a consultant or a licensed life insurance professional who can delve deeper into the topic. Just be sure to understand how it all works before making the choice.