While term life insurance may not necessarily be “better” than whole life insurance, term is definitely the right choice of coverage in most situations.
Term life insurance is coverage that lasts for a specific period of time. Permanent coverage, whole life being the most well-known, lasts your entire life.
Because the main goal of life insurance is to protect your loved ones during their most financially-vulnerable years, a life insurance product that you only pay for during a specific period of time makes the most sense—in most cases.
» Calculate: Life insurance needs calculator
When Term Life Insurance Is Better
If you have a young family and a mortgage, your loved ones are in their most financially-vulnerable years. Your spouse and children are dependent upon your income. If you were to die suddenly, would they be affected financially? This is where term life insurance can be lifesaving.
Are you a good saver?
If you’re a good saver, and by this I mean you regularly contribute to a savings and retirement account, purchasing term life insurance to protect your family for a definitive number of years is ideal. Your family has the protection they need, when they need it, and then the protection drops off later in life when your children are grown, the mortgage is paid down, and you have a healthy savings. Like most types of insurance, term life insurance is a product you hope you never have to use.
Are you on a tight budget?
If you already have a tight budget, term life insurance is ideal because it’s quite inexpensive. Imagine you died without life insurance, how much tighter would your family’s budget become without your income? Even a small $100,000 policy can go a long way for a struggling family – and its premiums won’t affect your monthly budget too much. Even if you’re not in stellar health, a $100,000 policy is affordable.
|Estimated Cost of a
20-Year $100,000 Term Policy
for a 35-Year-Old Male
|Risk Class||Monthly Premium|
(Best Health Class)
Do you have outstanding loans?
Term life insurance is ideal if you have loans because you can dictate how long you want coverage for. As an example, if you want to apply for a small business loan, you’ll need to give the lender a guarantee that you can pay back the loan, even if you die. This is when life insurance comes into play.
Another example, let’s say you and your spouse just purchased a house for your growing family. Your mortgage loan is a 30-year term. Buying a 30-year term policy makes the most sense. It will be the financial back-up should something happen to you and it will ensure your family won’t have to sell the house.
» Learn more: Cover your debt with life insurance
Less common than mortgages and business loans, but still applicable to some, are co-signed loans. Maybe your parents co-signed your mortgage for you or your grandma is the co-signer on your private student loans, purchasing a term policy to protect those co-signers is not only smart, but a way to say thank you to those who supported you in your time of need. If you were to die before those loan balances were paid off, the lenders would come after those co-signers for the money. However, a term policy’s death benefits can be used to pay off those balances instead.
Whole life insurance, if necessary, is best purchased as a supplement to term life insurance.
When Whole Life Insurance Is Better
Whole life insurance is life insurance coverage that is life-long and accumulates a cash value, which explains why you’re going to be paying about 10x more for a whole life policy over a term policy. To give you an idea of the cost of whole life insurance, a $100,000 whole life insurance policy will cost a 35-year-old male an estimated $121 per month.
To again illustrate how much more inexpensive term is compared to whole life, let’s consider that whole life premium payment of $121 per month. How much term insurance coverage could that purchase?
Example 2: A 50-year-old female in good health and does not smoke can also purchase a 20-year $1,000,000 term policy for a little over $100 per month.
Example 3: A healthy non-smoking 30-year-old female can purchase a 30-year $2,000,000 term policy for $100 per month.
Example 4: A 40-year-old male who had thyroid cancer could purchase a 30-year $500,000 term policy for under $100 per month.
Example 5: A 55-year-old male with well-managed Type 2 Diabetes could buy a 20-year $250,000 term policy for about $100 per month.
However, it’s worthwhile to note that you likely would purchase much less whole life insurance than term life insurance. For example, you typically wouldn’t buy enough whole life insurance to cover the cost of your mortgage because your mortgage won’t last your entire life, usually only 10-30 years.
Whole life insurance, if necessary, is best purchased as a supplement to term life insurance. For example, you could get a 30-year term policy to cover your mortgage and family needs such as tuition and then supplement it with a small whole life policy that will cover your funeral costs or any medical bills and leave behind an inheritance.
Do you have a child with special needs or a disability?
If you have dependents who will rely on you long-term, then a whole life policy would be better in this case. A term policy can still be useful to cover big ticket items such as your mortgage, but a whole life policy can help ensure your loved ones will always be financially protected even after you’re gone.
Are you not a disciplined saver?
You may have heard the saying “Buy term and invest the difference.” This is a good saying. Because term insurance is so affordable, it makes sense to own term and put the money you would have spent on a whole life policy into investments. However, this really only works if you actually invest that difference.
No judgment, but if you’re the type to have extra funds at the end of each month and end up just letting it sit in a checking account or spend it on something you don’t need, then you might want to consider a whole life policy. A whole life policy will not only ensure your beneficiaries will have the necessary funds for your final expenses, but this policy also builds a cash value that you can borrow or withdraw from should you need it (however, there are caveats to this such as paying interest.)
Should I Buy Term or Whole Life?
Whether you buy term, whole, or a little of both is ultimately up to you and it depends on your lifestyle and financial situation.
Again, in the majority of situations, a term life insurance policy is going to be your best option. It’s affordable, you have multiple term length options to choose from, and you can customize a policy with a rider or two if you so choose. A “rider” is an add-on you can purchase separately for your policy and there are many different types.
» Learn more: The Most Common Types of Life Insurance Riders
|Term Life Insurance versus Whole Life Insurance|
Not sure how much life insurance coverage you need for your particular situation? Give our life insurance needs calculator a whirl. Answer three questions and it gives you a good estimate on how much term life insurance coverage you should buy.
Remember, if you ever have any questions or would like to discuss your life insurance options with a real person – we’re here to help. Contact us at any time.
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Photo credit to: Bruce Dixon
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