What’s The Difference Between Term And Whole Life Insurance?

What’s The Difference Between Term And Whole Life Insurance?

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term and whole life insurance

We all want life insurance to make our death easier on our families, right? But what type of policy should we purchase? The main ones are term or whole life, but what is the difference between term and whole life insurance?

Good question! If you don’t know the differences, you are not alone. Although I have owned both over the last 30 some odd years, I really different understand the differences between these two types of life insurance policies until just a couple of years ago!

Let’s figure out what makes them different. We’ll also try to figure out which type is better, and maybe make a recommendation on which type you should really consider purchasing.

 

What Is Term Life Insurance?

Term is a policy that you can purchase that will pay a fixed amount upon your death, as long as you die within the term/period of the policy. When you pass away, as long as it happens during the covered period, your beneficiaries will receive the amount provided in the policy. Simple, right?

Let’s make an example to show how this works. George purchases a 10 year term policy for $100,000. George names Stacey (his poor wife) as the sole beneficiary. After 2 years George gets eaten by an alligator and passes away. What will his term policy do in this scenario?

When George passes, Stacey runs to the insurance office (with a smile on her face?) to make a claim. She presents the original death certificate and her I.D. She also fills out a few forms that her agent gives her. And the agents says…..

“Congrats Stacey! Here’s your check for $100,000. That sucker George had purchased a term policy for 10 years. He died within that term period (2 years). The benefit amount was $100,000. George kept up with his monthly payments, so the policy was in effect when he died.

And… Stacey runs to the casino to have some fun!

Of course this is a simplified explanation, but it gets the point across. A term life insurance policy only covers a set number of years. The amount that will be paid out upon death is the policy limit that you purchase. When that term/period of time expires, so does the policy. As long as you make your regular payments, the policy will be in effect. The amount of your payments will never go up, or down. The amount of money that your beneficiary will receive upon your death will also never go up, or down.

That explains term insurance fairly well. Now let’s explain whole life before we try to figure out the differences between the two.

 

What Is Whole Life Insurance?

Whole life insurance is a policy that you can purchase that will pay an amount of cash to your names beneficiary upon your death. As long as you keep up with the payments, it will always be available, up until your death. You can carry it for your “whole” life. You can also build up a “cash value”. Get it?

Let’s use another example to try to make sense of it. Clint (the good old boy) figures out that he wants his family to have a few dollars when he dies, so he buys a whole life policy with a policy limit of $10,000. He names the beneficiary as his wife Summer.

Two years after he buys the policy he calls his agent. He wants to “borrow” money out of his whole policy. His agent explains that he has a cash value of $500. Since that $500 would get Clint some nice and new rims for his truck, he borrows it.

The day after Clint borrows from the cash portion of his $10k policy, he dies when his truck falls on him while changing the tires. What can poor Summer get now?

The agent tells Summer that since this was a whole life policy, and that Clint kept up with the payments, the policy was in effect because there was no set period of time when the policy would expire. He also explains that the maximum payment that she could receive is the policy amount of $10,000. Sadly, since Clint borrowed $1k from the cash portion, and didn’t pay it back, Summer will get a check for $9,000.

 

So What’s The Difference?

Now we have a basic understand of term and whole policies, but what’s the big difference between term and whole life insurance?

  • There is no cash portion that you can borrow against with term, but there is one with whole. You can also cancel a whole policy at any time and get a check for the cash value portion.
  • Term life insurance is way cheaper that whole life. Way, way cheaper!
  • With a whole policy you can carry it for life, at a fixed price per month. With term it will expire at a fixed amount of time. If you buy another term policy after your first one expires, it’s probably going to cost a lot more because you are older and more likely to die within coverage period.

 

Which Policy Type Should I Buy?

I’m not an insurance agent, so I’m not going to tell you what type of insurance you should buy. But I can make a few suggestions so that you can figure this out for yourself:

  1. Both types are a lot cheaper when you are young. If you buy a whole life policy at age 21, that rate that you are paying is locked in for life. You will keep paying that same amount (for the same coverage amount), even when you are 60 years old. If you buy a term policy at age 21, that rate is only locked in for “x” number of years, as defined in the policy. As you get older, the cost of that term insurance is going to rise every time you have to buy a new policy.
  2. Term is just flat out cheap. The reason that it’s so cheap is that the policy will expire in “x” number of years. The insurance companies aren’t stupid. They know that you will most likely not die within those “x” years, so the likelihood of your family cashing it in is really low.
  3. A whole policy makes a lot of good sense when it comes to final expenses. If you figure that most of us will cost around $15,000 (give or take) to bury, purchasing a low amount of whole to cover those final expenses just feels right. Having to worry about your family begging for funeral money bothers me.
  4. I love having a large term policy while I still have kids at home and a mortgage. Most of us (hopefully) will have a home with no mortgage and kids by the time that we are 50. Purchasing a large term policy that will cover the mortgage and the cost of raising kids is affordable. For instance, I have term policies of over $300,000. If I die today, my wife can pay the mortgage off and finish raising the kids. Getting a large term policy is pretty inexpensive, but getting a large whole policy would cost a small fortune.

 

The Conclusion?

Both term and whole life are beneficial. They each serve a purpose: taking care of our family when we are gone. It’s hard to go too wrong with picking one or the other, or even mixing it up with some of each.

If you benefited from this little article at all, I would really appreciate it if you took a moment to share it on Twitter or Facebook. You can find some little share buttons below. Thank you in advance.

 

P.S. Here’s a little video on the topic that you may enjoy as well.

 

 

P.P.S. Thank you Dez for helping me with this topic. If you are in the Baton Rouge, LA area, you should give him a call at 337-257-6998 because he is the NUMBER ONE LIFE INSURANCE AGENT IN BATON ROUGE!

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George is an avid writer who covers a wide variety of topics for several online publications. When he's not writing, you can usually find George fishing, playing with his kids, or trying to be a better husband with his wife.

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