If the distinction between whole life insurance (also called “permanent” life insurance) and term life insurance seems a little hazy, you’re not alone. Nearly half of Americans with one of the two policies aren’t exactly sure, themselves.1 While most Americans know that their life insurance policy distributes money to their beneficiaries if they pass away, they may not be able to explain the differences between whole life and term life insurance or the benefits available to them. If you want to protect your family’s financial future, it’s critical to understand the pros and cons of each.
With those considerations in mind, this blog will help you better grasp:
- Why you need life insurance
- The pros & cons of term life insurance
- The pros & cons of whole life insurance
- What to do next before you buy or change your policy
Why Do You Need Life Insurance?
Before weighing the benefits and limitations of term life versus whole life insurance, you first need to determine what exactly you want your policy to accomplish for you and your family. The starting point for many is the need to protect from a loss of income should one of the family’s earners pass away. This explains why a life insurance death benefit often dovetails with a short and long-term disability policy (or a disability rider): all meet similar income replacement needs.
Families with young children also need to consider increased child-care expenses should it lose a stay-at-home parent. Any policy should provide enough benefits to keep the long-term family budget neutral. The age, income, and time horizons of adults and children are all key to making any decision about the income replacement levels that are necessary.
However, other families might have more comprehensive needs. Some may be planned, such as supplementing your retirement income or funding education for your children or grandchildren. Other unplanned needs could also be accommodated with the help of life insurance, like offsetting the financial costs of a chronic illness or covering an emergency expense. Meeting with a licensed insurance professional can help you determine your personal and family needs.
Benefits & Limitations of Term Life Insurance
Term insurance covers a fixed span of time – or term – and is generally considered temporary insurance. The term can last as little as one year, and you can scale it from there depending on the provider. The average span of a term life insurance policy is between 10 and 30 years, but the term can also cover someone until they reach a specified age or structured in such a way that it ends at a specific point in time (when children graduate college; when earners reach retirement age, etc).
To qualify for term life insurance, you typically have to undergo a medical exam, sometimes called a life insurance exam. Medical exams are often required because the coverage amounts are high. You can expect a physical exam along with a thorough review of your medical history. Applicants over 50 often must undergo an electrocardiogram to check heart health. A recent article from Forbes highlighted exactly how to prepare for and what to expect at a life insurance medical exam.2
Because of how a term life insurance policy is set up, a policyholder can expect lower premiums when they are younger and larger death payouts. However, you can expect rapidly increasing premiums with age or with new, adverse health conditions. Another, key limitation we encounter with these plans for your professional clients is that no cash value accumulates over time. Here is a basic breakdown of the pros and cons:
Benefits & Limitations of Term Life Insurance
| Pros | Cons |
|---|---|
| Lower premiums on policy when younger | It’s temporary coverage and premiums may go up later in the policy |
| Beneficiaries tend to get larger death payouts | No cash value accumulates (like renting a house for 30 years) |
| Good for addressing requirements that will disappear in time | New health conditions/age may make a new policy cost prohibitive |
| Can often be converted to a whole life policy later | Pre-existing conditions may make initial coverage difficult/costly |
Benefits & Limitations of Whole Life Insurance
In contrast, a whole life insurance policy provides coverage for your entire life as long as you pay the premiums. This type of insurance can accumulate cash value, which builds up in the policy as you pay your premiums. Depending on the provider, you can also withdraw a policy’s cash value in the form of a policy loan or apply it toward the policy’s premium, providing greater financial flexibility.
Depending on the provider, some whole life policies don’t require a medical exam to qualify, you just answer a few health questions. This may make it easier to qualify if you have health issues. Whole life insurance adds certainty to your financial future by balancing out some of life’s unpredictability with guarantees and flexibility. In exchange for your premium payments, your policy provides a lifetime of protection and value that can help you protect the things that matter most to you in life.
A whole life insurance policy can be also used to supplement retirement income. If your policy has accumulated enough cash value, you can use that tax-advantaged money as part of your retirement’s financial mix. Unlike retirement savings accounts, the cash value is insulated by fluctuations in the market and the money may be tax-free when you start withdrawing it. While that could impact the amount of money you’d be leaving to your beneficiaries, it is another guaranteed asset you could plan and rely upon.
Benefits & Limitations of Whole Life Insurance
| Pros | Cons |
|---|---|
| The premium amount is fixed and lasts for the entire policy term | Policies tend to be more expensive than term life coverage |
| The policy can accumulate significant cash value over time | Can take 10-15 years to accumulate significant cash value |
| A portion of cash value can be withdrawn or borrowed | Can be difficult to understand without qualified guidance |
| Can offer significant tax benefits depending on the tax situation | Typically have smaller death benefits than term life policies |
What Comes Next?
Hopefully, you now understand some of the benefits and limitations of each type of policy. That said, everyone’s situation is unique. That’s why it is recommended that you take advantage of a free consultation with a licensed insurance professional to determine what exact policy will work best for you and your family. But not every insurance agent works the same way.
At GE Insurance for Life, our purpose is to educate business owners and professionals on how to build wealth by using proven strategies that help them to grow their hard-earned dollars, while also protecting their families through life insurance products.
We often find ourselves working with clients who want to take advantage of permanent life insurance as it is the only vehicle that exists today without contribution limits, where your money can grow tax-deferred, and where you have tax-advantaged access to the cash value build-up through loans and surrenders to basis.
GE Insurance for Life also specializes in long-term disability insurance and is contracted with some of the top insurance companies in the country. We make certain that you get the coverage you need if you become injured or physically/mentally ill. You insure your mobile phone, your car, your home, and hopefully your life. The bigger question is, have you insured your paycheck? Get started today with a free consultation.
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