What is the difference between term and whole life insurance?

Answer 1

Whole life combines savings with a life insurance policy. Term life is just the policy and is generally much cheaper. A smart invester would never buy whole life until all other savings are maxed out (IRA's, 401K, etc.) and it is the last resort. David Bach (Author of "Smart Couples Finish Rich") says to buy Term Life Insurance and invest the difference. Many times with a whole life policy, your life insurance goes up and down inside of the policy. So you are saving very little over the years, certainly not enough to retire. Putting your money into a Term policy and the difference into an IRA or increase your 401K contribution is much smarter in the long run. The significant difference between whole and term life insurance can boil down to the fact that at the end of the day, a term life policy offers only life coverage. Unlike whole life insurance that adds on an investment component. This in turn makes whole life insurance policies much more expensive. This extra cost might make sense if the investments assured rich pay offs. But this is not always the case. Marketed as retirement funds or forced savings, it has to be said that there are several more effective ways to invest your money. Many of these policies come along with commissions and high fees. In comparison, term life policies are inexpensive. And if you are smart enough to purchase your policy when you are young and healthy, the returns far outweigh the modest premiums.

Answer 2

Term life insurance only lasts for a specific number of years, but whole life insurance will cover you for the rest of your life as long as you've paid the full amount of premiums. It is radically different from term life insurance, because some of your monthly premiums are invested into shares, bonds and other investment vehicles. This acts as a 'cash value' savings asset that you can claim if you live longer than the length of your policy or borrow against the amount, but it makes whole life insurance policies more expensive than term life insurance policies.

Answer 3

Whole life

1) Whole Life is a form of permanent insurance. Permanent insurance comes in a variety of forms, e.g., universal, variable universal, equity-indexed, etc. All have unique attributes, advantages and disadvantages.

2) Premiums remain fixed until a predetermined age, until the policy matures or "endows" (typically age 100), or when you die. If you live to endowment age, the company will pay the face amount of the policy to you, tax-free.

3) There will typically be a "surrender period", often 10 years. The surrender charges decrease over time, thus, it may appear that in the early years, all premiums go to the insurance company as the surrender charges may equal the accumulated value. At the end of the surrender period the surrender value will equal the cash value.

4) Cash value typically accumulates at an annual interest of around 3%.

5) You may access money from the policy be either withdrawing from or by borrowing from the cash value. Withdrawals above basis will be treated as income and taxed accordingly. Loans from the policy do not incur taxes. Interest will be assessed on a loan, typically between 3% and 6%, sometimes as high as 8%, depending on the policy.

6) If there is a loan balance at death, it will be deducted from the face amount of the policy. If you cancel the policy while there's a loan balance, you may be responsible for income taxes on the gains.

7) When you die, the face amount (less any loans, loan interest due, and missed premiums) will be paid to your beneficiary.

8) Because cash value is accumulating in the policy, you are actually only paying for the difference between the face value and the accumulated value.

For example, if you have cash value of $250, 000 in a $1,000,000 policy, you are only purchasing $750,000 of insurance. This is how much the insurance company must come up with to add to your cash value to pay your beneficiary the full $1,000,000.

9) Properly designed, the cost of insurance will decrease over time to the point no money is required out of pocket - any insurance costs are taken directly from the cash value (and therefore paid with tax-free money).

Term Insurance

1) Does not build cash value. This allows you to save money elsewhere - possibly with better returns.

2) While premiums appear to be considerably lower than whole life insurance - the actual cost of the insurance itself is not substantially different. This is because

a) whole life has an investment component (i.e., only a portion of your deposit goes to the insurance cost), and

b) the insurance company is obligating themselves to take on the added risk that comes with aging.

3) Provides coverage for a limited time, then expires (like home-owner's or auto insurance).

4) At the end of the term, some companies may renew without proof of insurability. However, most will require underwriting. If you are still insurable, the premiums will be considerably higher as you are now that much older. (To get an idea of how much more, get quotes for both your current age and 20 years older.)

5) Keep in mind that term insurance only pays about 3% of the time. The other 97% outlive their policies. (Just like home-owner's or auto insurance, we hope to never have to use it!)

The original author said:

Some may argue that it will get more expensive when it is time to renew your term insurance. While that is true, you should put together a plan so that you don't need life insurance forever. I think 20 year level term is long enough for most people. If not, a 30 year level term. Lets say you got a 30 year level term and pay about $600/year for $500,0000 coverage. And you invest $400/month into a Roth IRA for the next 30 years. The investments I own have an average rate of return of 12% in the past 30 years. To be conservative, lets say you get a 8% return in the next 30 years. In 30 years, you will have about $600k saved for retirement. If you get 12%, it will be $1.4 million.

I add:

Renewal of term insurance will absolutely be more expensive. Guaranteed.

Will you need life insurance forever? Who knows?

If your child were diagnosed with multiple sclerosis at age 40, would you want to be able to provide for him/her well beyond your death?

If you died six months after Bernie Madoff cleaned you and your wife out 10 years into retirement, would you want her to regain her footing?

Will your heirs incur estate taxes? An $20M estate in 2011 may incur taxes of $8M or even more! (Do you really want to say "Sorry, kids, I chose to give the IRS half of your inheritance..."?)

Life insurance isn't necessarily just about the people you leave behind though, it can also be about you:

Do you own a business? There are few (if any) better methods to transfer money from the business to the owner tax-efficiently. Likewise, there are few, if any, better methods to sell or transfer ownership of a business than through the use of life insurance.

Do you want to pay for your children's college? Sure there are 529 plans, but what if your kid gets a full scholarship? Or doesn't go to college? You can give the plan to a niece or nephew or you can pay tax on the growth and pay a penalty.

As far as investments are concerned, anyone making 12% per year for 30 years deserves huge kudos. (While the Stock Market has averaged 12%, the individual investor has averaged closer to 6%. Sad but true statistic.)

I'm glad the original author said "Roth IRA" - tax-free income trumps taxable income.

But what if you make too much to qualify for a Roth IRA?

Do you have the means and desire to contribute more than $400 to a Roth IRA?

What if you want a Roth for yourself, a 529 plan for your children, and need life insurance?

So, give me the bottom line!!! Is whole life or term better?

Neither is better than the other. But one will offer a better solution than the other for your particular needs, goals, and abilities.

No one in this forum - or on the web - can answer that for your situation. We can only help educate you about the products, their differences, pros and cons, and even offer our own opinions or biases.

Talk to your financial advisors - knowing the facts first will keep them honest!

Answer 4

Term insurance can be thought of as "pure protection" in the sense that it provides only a death benefit, and then, only if the insured dies for a reason that is not excluded by the policy during the term of the policy. Frequently, the maximum term of 20 years from the date of issue, although it is sometimes stated as being the attainment of a fixed age by the insured. A related characteristic is that it accumulates no "cash value", which is often thought to be something akin to a savings element. If premiums cease to be paid while the insured is still alive, the coverage of a term policy ends at the end of any grace period for the payment of premium (often, 30 days).

In contrast, a whole life policy is sometimes called "permanent insurance". The premium is greater than the premium for a term policy of the same face amount, because a portion of the premium is applied to the actuarial determined cost of providing the protection, and a portion is applied to the cash value. Although the cash value accumulates slowly at first, it "gathers steam" over a period of time.

One of the characteristics of cash value is that at some point during the policy's life, it may reach a point of being sufficient to support the policy and thereby render unnecessary the need for further premium payments. There are many variants of whole life coverage, such as types that permit the insured to invest a portion of the premium into a mutual fund.

Keep in mind always that life insurance is designed as protection and not as an investment. Make your choices accordingly, do your due diligence, understand your current and anticipated financial needs, and seek out unbiased advice. Moreover, only transact business with an insurer and an agent that/whom is licensed to transact insurance business in your state. License information can be had through your state's Department of Insurance located in the state capitol.

The insured will not get any assured money in term life insurance but in case of whole life insurance, the insured will get assured money at the end of the maturity.

Answer 5

Term life is temporary coverage for a period of time that you choose based on your needs (mortgage paid off, kids finish college, retirement, etc) for 10, 15, 20, or 30 years. Regular simple term does not accumulate any cash value. If you add the Return of premium rider you will receive all premiums paid, back at the end of the term chosen.

Whole Life is permanent insurance (guaranteed to stay in force to age 100, 115, etc) and can accumulate cash value.

Contact an experienced agent to help you choose what's best for your situation.

Answer 6

The difference between whole and life term insurance is that a term policy is life insurance only whereas the whole insurance combines a term policy and a investment component so one can build cash value and borrow against it.

Answer 7

Whole life insurance delivers coverage for the lifetime of the policy holder. It guarantees a fixed premium which can build cash value (which usually cannot be withdrawn without cashing the policy out). Term life insurance guarantees a fixed premium for a shorter period of time, and builds a better and more usuable cash value than whole life. At the end of the term policy the holder must either sign up for another term or forfeit coverage.