Term life insurance is coverage for a specific sum of years where the benefits are awarded to the beneficiaries if the insured dies within the coverage period. Whole life insurance is protection for benefits to be paid to the beneficiaries at any time the insured dies. Both coverages have their pros and cons, but the former is significantly cheaper than the latter. Whole life premiums can cost five to 15 times more than term policies with similar benefits.
Now, we’ll compare Term life vs Whole life insurance before deciding on which is the better option for you.
1. Risks Involved and Resultant Cost
Term insurance can be a better option than life because it costs significantly less. The difference in rate is due to the low probability of claiming within this period, which is low-risk for the insurance company. Investing in term coverage is a high-risk decision for the insured person because there is no guarantee that death will come before the plan expires. The risk may be reduced where the client is battling a terminal illness like cancer with low life expectancy.
Whole life insurance is a safer investment because it builds up cash value. In contrast, term life insurance has no cash value because it has an expiration date. There are no restrictions for whole coverage. It is a full-ride investment that remains valuable until you die. You may choose to switch a term policy to whole if it expires while you’re still alive, but you will be asked to pay a significantly higher premium upon renewal.
2. Benefits Provided
A term life policy only provides death benefits while whole life includes other benefits such as automatic savings, borrowing, and dividends. Just like savings, whole life policy cash value accrues over the years until you die as your investment continues to earn tax-free interest. You also receive annual dividends, which are rewards from the company determined by the amount of profit made per year. The insured may choose to receive the dividends or re-invest them to add to the policy’s cash value.
Lastly, you are allowed to loan your insurance benefit under a whole life policy. The cash value is affected when you borrow from your benefit. but there are no penalties or charges for this type of loan transaction. Term coverage features none of the additional benefits of whole insurance, including savings, dividends, and loans.
So, Which One is Better?
When you have tight finances and a solid prediction that your life will end within a specified period, a term policy is a financially savvy option. It doesn’t include other benefits that the whole policy does, but it can keep you from going broke with affordable premium rates. The better choice is dependent on your specific situation and financial capability. Whole life offers a better deal but may be unattainable for some persons; hence, neither is unimportant or of lesser quality than the other.