Which Is Better Term Insurance Or Life Insurance? Both term life insurance and permanent life insurance (also known as whole life insurance) have their pros and cons, and which one is “best” for you depends on your circumstances and financial goals.
Term life insurance is a type of life insurance policy that provides coverage for a specified period or term. If you die during the term of your policy, your beneficiary will receive a death benefit. If you survive the term of your policy, the cover will expire and you will not receive a benefit.
Term life insurance is generally less expensive than permanent life insurance and is often the best option for people who only need life insurance for a certain period, for example, to cover a mortgage or to provide income for a family during their working life. to provide.
Permanent life insurance, on the other hand, provides coverage for a lifetime and often includes a savings component, known as cash value, that can be used to build tax-deferred savings and potentially provide a source of income in the future. Permanent life insurance is generally more expensive than term life insurance, but it can provide you and your family with lifelong protection and financial security.
Term Life Insurance
Term life insurance is perhaps the easiest to understand because it’s simple insurance, with no bells and whistles. The only reason to buy a term policy is the promise of a death benefit to your beneficiary in the event you die while it is in effect.
As the name suggests, this simplified form of insurance is only valid for a certain period, be it five years, 20 years, or 30 years. After that, the policy simply expires.
Due to these two characteristics, simplicity and finite duration, term policies are also often the cheapest, often by a large margin. If all you want from a life insurance policy is the ability to protect your family when you die, term life insurance is probably the best option if you can afford it. Since term policies are often more affordable and can last until your child reaches adulthood, they can be an option for single parents who want an extra safety net.
The average 30-year-old man can get a 20-year term policy with a $500,000 death benefit for $27.42 a month. Because of its generally longer lifespan, the average 30-year-old woman can buy the same policy for just $21.74.
A variety of factors will, of course, change those prices. For example, a larger death benefit or longer-term coverage will certainly increase premiums. Also, most policies require a medical exam, so any health complications can also push your rates above the norm.
Because term life insurance eventually expires, you may have spent all that money for no purpose other than peace of mind. You also can’t use your investment in term life insurance to build wealth or save taxes.
- Term life insurance is generally much less expensive than other types of life insurance.
- It is easier to understand than “permanent” policies.
- Protection is only available for the term of the policy.
- It cannot be used as a wealth accumulation or tax planning strategy.
Whole Life Insurance
Whole life is a form of permanent life insurance, which differs from term life insurance in two important ways. For starters, it never expires as long as you keep making your premium payments. It also provides some “cash value” in addition to the death benefit, which can be a source of funding for future needs.
Most whole-life policies are “level premium,” meaning you pay the same monthly rate for the life of the policy. These premiums are divided in two ways. Part of your payment goes to the insurance component, while the other part helps build your cash value, which grows over time.
Many providers offer a guaranteed interest rate (often 1-2% per annum), although some companies sell participation policies, which pay unguaranteed dividends that can increase your overall return.
Initially, the amount of the life insurance premium is higher than the cost of the insurance itself. As you get older, however, that reverses and costs become lower than a typical term policy for someone your age.
This is known as “preloading” your policy.
At a later date, you can borrow or withdraw your cash value, which is tax-deferred, to pay for things like your kids’ college tuition or home repairs. In that sense, it is a much more flexible financial instrument than a term policy. Loans from your policy are tax-free, although you must pay income tax on the investment proceeds from any withdrawals.
Unfortunately, death benefit and cash value are not entirely separate features. If you take out a loan from your policy, your death benefit will be reduced by the appropriate amount if you do not pay it back. For example, if you take out a $50,000 loan, your beneficiaries will receive $50,000 less, plus any interest owed if the loan is still outstanding.
The main disadvantage of a life insurance policy is that it is significantly more expensive than a term policy. Permanent policies cost on average between five and 15 times more than temporary coverage with the same death benefit. The relatively high costs make it difficult for many consumers to keep track of payments.
Another potential drawback of life insurance is its complexity. With a term policy, for example, you can simply stop paying if you no longer need the insurance or can no longer afford it.
However, depending on your business, lifetime policyholders may face a surrender charge of up to 10% of the cash value if they decide to cancel their policy. Usually, this charge decreases over the years until it finally disappears.
- Whole life insurance allows you to borrow against the policy for future financial needs.
- Loans, like death benefits, are generally tax-free.
- You can insure your premiums for life.
- Whole life insurance policies are much more expensive than comparable term policies.
- If you have to let the policy expire within the first few years, you may incur surrender costs.
- Any outstanding loans reduce your death benefit.
Special Considerations – Which Is Better Term Insurance Or Life Insurance
So which type of coverage is best for your family? If temporary coverage is all you can afford, the answer is simple: Basic protection is better than no protection.
The question is a bit more complicated for people who can afford the significantly higher premiums that come with a lifetime policy. If saving for retirement is your goal, many fee-based (i.e., no commission) financial advisors recommend turning to 401(k)s and IRAs first. After those contributions max out, a cash value policy may be a better option for some people than a fully taxable investment account.
Some consumers have unique financial needs that they can manage more effectively with a lifetime policy. For example, parents with disabled children may also want to consider life insurance, as it lasts a lifetime. As long as you continue to pay the premiums, you know that your children will receive the death benefit of your policy.
It can also be a valuable succession planning tool for small businesses. As part of a purchase and sale agreement, business partners sometimes purchase a life insurance policy for each owner so that the surviving partners can purchase the deceased’s equity interest in the event of their death.
Regardless of the type of insurance, the premiums will be lower the younger (and healthier) you are when you buy it.
Is term life insurance better than life insurance?
This is the age-old question in the life insurance industry. The answer is that it depends on your needs and desires. If you only need life insurance for a relatively short period (for example, if you have to raise minor children), the term may be more favorable because the premiums are cheaper. If you need permanent coverage that will last a lifetime, you may want lifetime coverage. Whole life also provides various life benefits derived from the accumulation of cash value, reducing the actual cost over time.
What are typical life insurance commissions?
Life insurers or their agents receive a commission from the sale of a policy. This typically amounts to 60-100% of the first year’s premium amount and a series of smaller ongoing residual payments each year (perhaps 2-10% of that year’s premium).
How many years are the longest-running policies?
Typical term life insurance policies come in terms of 10, 15, 20, 25, or 30 years. A small number of insurers will also offer 35 and 40-year policies.
Conclusion – Which Is Better Term Insurance Or Life Insurance?
Which Is Better Term Insurance Or Life Insurance? The choice between term insurance and life insurance depends on your specific needs and financial situation. Here is a brief description of the differences between these two types of insurance:
- Provides cover for a specific period (eg 10, 20, or 30 years)
- Generally has lower premiums than permanent life insurance
- Does not generate cash value
- Only provides cover if the policyholder dies during the term of the insurance
Permanent life insurance (also called Whole Life or Universal Life):
- Provides cover for the entire life of the policyholder.
- Typically has higher premiums than term life insurance
- Builds cash value over time
- Provides cover for the policyholder’s life, not just for a specific term
When choosing between term life insurance and permanent life insurance, it’s important to consider your long-term financial goals and how much coverage you need. If you are looking for a less expensive way to protect your loved ones in the short term, term life insurance may be a good option. If you’re looking for a way to provide long-term financial security and build cash value, permanent life insurance may be a better option. It’s also a good idea to consult a financial advisor or insurance agent to help you determine the right type of insurance for your needs.