Differences between term life and whole life insurance policies

09th November, 2021

Insurance policies are excellent sources to build personal finance. Many people invest in an insurance policy for several reasons. Some individuals want to create a safety net for their families, while others wish to increase their cash reserves. Today, we will understand the difference between term life insurance and whole life insurance. Each insurance policy has its pros and cons. Let’s analyze the core differences and similarities of both types of life insurance policies.

What is a term life insurance policy?

Term life insurance policy is also known as “pure life insurance.” That’s because a term life insurance is beneficial for people who wish to take care of their family in case of an untimely demise. Just like the name suggests, the term insurance policy only lasts for a specific term. Usually, people take out a policy for 10-30 years. If the person who has taken out the policy passes away during this term, the beneficiaries will receive a specific amount. But term policies do not offer a cash payout. So, if the insurance policy term is over, the individual will have to renew the policy and will not receive any cash payment. The advantage of this policy is that the monthly premiums are considerably low, which is why most people opt for a term insurance policy.

Pros & cons of a term life insurance policy

Now that we have a clear picture of a term insurance policy, let’s dive deep into its pros and cons. It is always recommended to go through every aspect of an insurance policy before investing in one.

  • Pros
  • The cost of a term insurance policy is much lesser than that of a whole life policy
  • The premium amount has to be paid for a specific term
  • Term insurance policy is much simpler to understand
  • It has a guaranteed death benefit
  • Cons
  • Does not offer an option to withdraw cash once the policy is over
  • There is no protection for the family once the term is over
  • This policy is not eligible for company dividends

Cost of a term life insurance policy

One has to be able to pay the monthly premium for a specific duration. This is where the term insurance policy comes in. It is cheaper than a whole insurance policy and guarantees a certain amount as a death benefit. New parents often take out a term insurance policy until their children finish studying and can support themselves financially. On average, a term policy is taken for 10-30 years. A 30-year-old woman can purchase a term policy for 20 years at the cost of $21.75 per month and receive a death benefit of $500,000. The same policy for a 30-year-old man will cost him $27.49 per month. Since women have a longer life span, they have to pay a lesser monthly premium.

Who should consider buying a term insurance policy?

When buying an insurance policy, a person must have their reasons laid out. They must know exactly why they are purchasing a policy and move on from there. The following people should buy a term insurance policy.

  • Someone looking for affordable coverage
    If you are looking for inexpensive coverage, then the term insurance policy is for you. The cost of a term insurance policy is five to 15 times lesser than a whole term insurance policy. It is much cheaper for women than for men. The monthly premiums may waver over a few years, but the cost will still be considerably lower than a whole insurance policy.
  • Want to fulfill a short-term need
    A person with a family or a mortgage should go for a term insurance policy. In case of your death, your family will be taken care of if there is a mortgage that can be paid off with the amount that will be received as a death benefit. This policy is the best option for those who want to secure the future of their loved ones.
  • Wish to convert to Permanent policy in the future
    Term policies can be converted into whole life insurance policies. This means someone who may not afford a whole life insurance policy can opt for a term policy and later convert it into a permanent policy. Most companies give you the option to do the same, but the time period may vary. It is best to check with the agency before locking down a policy.
  • Create a security fund for the family
    Some people only want to take out policies as an emergency fund for the family. Instead of investing a large amount in an insurance policy, one can use that amount to invest it elsewhere. If you want to create some security for your children or spouse in case of an untimely death, then a term insurance policy is the best option.

What is a whole life insurance policy?

Whole life insurance policies have a two-fold advantage. First, if the person passes away, the beneficiaries will receive a cash amount, and second is the cash value component. When a person opts for this type of life insurance policy, they also receive several tax benefits. One part of the premium paid is invested and grows over time, becoming a cash vault. The individual can take a loan against this amount or withdraw it after a specific duration. There is no tax charged on the gains made from this amount. Some individuals also prefer keeping this amount for their retirement funds. With the whole life insurance policy, one can be secure about their family in case something happens to them and at the same time increase their cash vault. The premiums for the whole life insurance policy are much higher. These policies are also known as permanent policies.

Pros & cons of a whole life insurance policy

Choosing the right insurance policy can be a bit tricky. These pros and cons of the whole life insurance policy will help you make a much-informed decision.

  • Pros
  • A whole life insurance policy offers a cash vault
  • One can borrow against the policy or withdraw a certain amount of cash
  • The premium amount can be locked in for life
  • There is no tax on loans like death benefits
  • Cons
  • Whole life insurance policies cost more than term life insurance policies
  • The premium has to be paid for your whole life. If it isn’t paid, the policy will be canceled
  • Outstanding loans on the policy will reduce the death benefit


Cost of a whole life insurance policy

People are often reluctant to opt for a whole life insurance policy, and one of the major reasons is the high cost. The cost of a monthly premium for a whole life insurance policy can be five to 15 times more than that of a term insurance policy. If a person is opting for a whole life insurance policy, they should pay a high premium every month for the rest of their lives. Failure to pay this premium will cause the policy to collapse. But the good part about paying a high premium is that you receive a guaranteed death benefit and a cash vault. So, on average, if a man wants to purchase a whole life insurance policy for a term of 20 years, he will have to pay $229 per month for coverage of $500,000. A 30-year-old woman will have to pay a premium of $193 per month for the same kind of policy.

Who should consider buying a whole life insurance policy?

Whole term insurance policies require you to pay a high monthly premium. This is an important thing to consider when opting for a whole life insurance policy. Another thing to keep in mind is that the premiums have to be paid for your whole life. Now that these two points are clearly laid out, this policy is beneficial for those:

  • Who want to build wealth
    When a person is looking to build wealth, they should opt for the whole life insurance policy. Apart from giving a death benefit, this policy also creates a cash vault for the policyholder. This amount can be used to get loans. The amount also grows at a steady rate, which can be highly beneficial in the future.
  • With a high income
    Individuals who earn a high income must opt for the whole life insurance policy. If you can afford the monthly premium for the rest of your life, then you should go for this policy. It will allow you to set a certain amount aside for your family while building a strong financial portfolio.
  • Who want to create a trust fund
    A whole term insurance policy can be used to create a trust fund. This can be used as a safety net for the children in case the policyholder passes away. If you have a lifelong dependent, like a disabled child, then this option is the best. When creating a fund, make sure to take proper advice from your attorney.
  • Who want to leave an inheritance
    When a person wants to leave a certain amount of money for their heirs, they should opt for the whole life policy. By purchasing this policy, you will be ensured that the beneficiaries will receive a certain amount of money. The amount will be directly paid to the loved ones instead of going through the estate.

Questions to ask before purchasing a life insurance policy

Now that we have a clear-cut picture about the term and whole life insurance policies, let’s understand what needs to be considered before purchasing a policy. These questions apply to individuals who wish to buy a term life insurance policy or a whole life insurance policy.

  • What is your age?
  • Do you have good health?
  • How many dependents do you have? (Wife, children, or other family members)
  • How old are your children?
  • Which colleges do they plan to attend?
  • What amount will your family need to survive in case of your death?
  • How much is your mortgage and other debts?
  • What will be the exact amount you will need for a retirement fund?
  • Will you need to worry about estate planning?
  • Do you wish to create a trust fund as a part of the will?

Term vs. whole life insurance policy: Which one is the best?

Both policies have a specific set of benefits. If a person has an average income but still wants to ensure their family is secure, they should go for a term life insurance policy. The monthly premiums are affordable and have to be paid for a certain period. One main drawback of this policy is that it cannot be used for wealth building. An amount will only be paid out to the family in case the person who has taken the policy dies. Once the policy expires, no amount can be withdrawn. The policy has to be renewed once the term is over, but the amount of premium per month is limited and will not be a pinch for someone looking to secure their family’s future if something happens to them.

Someone who has a high income and wants to diversify their financial portfolio can go for the whole life insurance policy. It gives you a death benefit as well as a cash vault. The company invests a certain amount from your premium. This amount grows consistently as long as you keep paying the premium. And the best part is no tax will be charged on the growing amount. One can also take out a loan against this amount. But if the person passes away and the loan amount is not paid back, that amount will be deducted from the death benefit. So, one needs to make sure the loan amount is paid on time.

If you want to create a backup for your family’s financial future, then a term life insurance policy is for you. Individuals who want tax benefits and build wealth while creating a safety net for their family should go for the whole term life insurance policy.

All in all, the best way to pick a policy is by comparing a term life insurance policy to a whole life insurance policy. Another thing to keep in mind is your income and your requirements. Along with your research, you should also speak with an insurance policy expert. Several insurance policy websites also provide the option of using an insurance calculator. After carefully comparing all the details of a policy, one must pick one that suits their needs.