Discussing life insurance with your loved ones is often an awkward and difficult process that detracts from the pragmatic decisions that need to be made in regards to your finances and the finances of your family. Chief among these pragmatic decisions is the consideration of whole life insurance vs term life insurance.
Whole life insurance is a product that ensures you will have the flexibility to borrow against your investment or cash-out altogether if you are ever in a situation where you need capital quickly or feel you have outlived the need your life insurance policy was intended to fill. On the other hand, term life insurance is a low-cost solution that can be tailored to your needs without tying up capital in an investment.
What Is Life Insurance?
Life insurance is an important tool for individuals concerned with protecting their families from the economic changes that could be brought about by their death. This includes accounting for lost income or services, healthcare-related expenses, and final expenses.
To understand how life insurance addresses these challenges, you must understand the distinction between whole life insurance vs term life insurance.
What Is Term Life Insurance?
As the name implies, term life insurance is relevant for a term pre-determined by the policy. If you perish during this term, the insurance company from whom you have purchased a policy will pay a pre-determined "death-benefit" to the beneficiaries you chose to list in your policy agreement, typically a spouse or your children. Once the term has expired, the policy is no longer in effect and the insurance company has no obligation to compensate you or your family in any way.
The most common available terms are 10, 20, and 30 years respectively. The exact term will be spelled out in a policy agreement before any potential policyholder agrees to purchase the policy. Similarly, the amount to be paid in the event of your death is variable and will be clearly identified in the relevant policy agreement. Obviously, the higher the "death benefit," the higher the monthly the premiums you will be charged by the relevant insurance company.
What Is Whole Life Insurance?
Whole life insurance is a life insurance policy and an investment rolled into one. Because whole life insurance does not have a term, someone will receive the cash value of the policy eventually, whether it be your spouse, your children, or any other relevant beneficiary. In this way, whole life insurance policies serve as an investment in the future of your family and ensure that your years of premiums won't go to waste.
Just like a term life insurance policy, the premiums you pay monthly will be determined by the value of the policy you choose; however, with a whole life insurance policy, you will have more flexibility to leverage the capital you have invested in your policy down line should that need ever arise.
Why Do You Need Life Insurance?
Life insurance is essential because, in the event of your death, your dependents and your spouse will be left without whatever income and services you furnished on behalf of the family.
Additionally, your family could be left with the considerable expenses requisite with end-of-life healthcare and housing costs. This two-fold financial burden, along with the emotional toll of losing you, requires a degree of financial security that life insurance can provide.
Supplementary Income for Your Family
The primary function of life insurance in any of its iterations is to ensure your family has sufficient income to avoid despondency in your absence. As you assess the difference between whole life insurance vs term life insurance, know that term life insurance serves essentially this purpose and this purpose alone; on the other hand, whole life insurance has embedded features to expand its benefits to policyholders.
In either case, life insurance, when carefully selected, will ensure that your family will continue to live in the manner to which they are accustomed based on your income or other financially valuable contributions you make to your family. For most policyholders, life insurance is intended to compensate for the income you no longer provide, but it can also compensate for a valuable service, most often childcare or services provided to other elderly family members.
As a Portion of Your Estate
One of the key advantages of whole life insurance vs term life insurance is that whole life insurance policies have an investment component and an underlying cash value. Because a payout is guaranteed for policyholders with a whole life insurance policy, the cash value of the policy grows slowly as you make payments, all of which are tax-deferred, similar to investment in an IRA or a 401(k). This gives policy holders an investment vehicle they do not pay taxes on until their families receive disbursements from the policy.
Another related advantage of whole life insurance vs term life insurance is that, because whole life insurance policies have a cash value, you can cancel the policy and receive the balance early if you find yourself in a difficult financial situation, or you can borrow against the policy, provided you are willing to make payments with interest thereafter. Neither of these situations is ideal, but both allow for greater financial flexibility later in life.
Term life insurance has no cash value unless, of course, you die within the pre-determined period in which case your listed beneficiaries will receive the death benefit in full. In any other case, the policy has no value outside of the peace of mind it lends to the holder.
One of the most important benefits for life insurance policyholders is that life insurance policies provide helpful capital for families who need to fund final services for their deceased loved ones.
Funerals are surprisingly expensive, and the last thing any family member wants to leave their loved ones is a costly burden just as their family is approaching a new segment of their financial life in which they have fewer parties earning and contributing than they have had in the past.
Medical and Hospice Expenses
If you, as the policyholder, pass after a prolonged struggle with a severe medical ailment, a large portion of your medical expenses may very well outlive you. These bills could become the responsibility of your spouse or children while they are dealing with the emotional and financial toll of losing an integral member of their immediate family.
Life insurance policies can be a great way to ensure your family is not stuck with onerous expenses such as medical bills after your departure.The same is true for hospice expenses. Based on where you choose to spend your final days, the expense can be considerable, especially in facilitates with the equipment to regulate complicated, life-ending diseases.
The expense of facilitates that make your final days comfortable may put a dent in your family's finances. If this is the case, a life insurance policy is an important tool to combat the stress caused by the financial burden of funding a comfortable end to a difficult process.
Whole Life Insurance vs Term Life Insurance | How to Select Which One Is for You
The five considerations you must take into account when considering whole life insurance vs term life insurance are explained below. We encourage each of our readers to consider all aspects of this important purchase carefully and engage in an open conversation with your family members.
As you weigh the benefits of whole life insurance vs term life insurance, it is essential to consider what is realistically within your budget. Whole life insurance, being the more comprehensive insurance product, comes with substantially more costly monthly premiums than term life insurance, regardless of which "death benefit" amount you choose to address your family's financial needs. This being the case, if you cannot afford to pay whole life insurance premiums, it is better to have some coverage than none at all.
If you select a term life insurance policy based on cost, be sure to choose a term that will apply to the entire interval in which you will be paying the bills or providing essential services on behalf of your family. This is so that when the term ultimately expires, you can rest assured your children are financially independent and your spouse is eligible to receive retirement benefits that will lessen the economic burden of losing you.
As we mentioned earlier in this article, term life insurance has no value as an investment; the product simply ensures peace of mind and provides financial resources in the unlikely scenario of your death within the pre-determined term, without any financial benefit to you or your family if you survive the term. If you want to ensure your family benefits from your payments one way or another and you have the resource to do so, whole life insurance is the best option for you.
Whole life insurance is a flexible, tax-deferred investment vehicle that pays the surviving beneficiaries you select once you have passed regardless of when that happens. The cash value of the policy will grow over time and can provide capital for various purposes associated with your death, whether that be your final expenses, the payment of the taxes associated with your estate, or investment in the future of your progeny.
The cash value associated with whole life insurance is also an important incentive for policyholders who may require financial flexibility in their golden years. If you purchase a whole life insurance policy, you can use the cash value of the policy as collateral for a loan that effectively comes from your investment in the policy, or you can terminate the policy altogether and collect the value of the investment to be used as you so choose. If you foresee circumstances wherein you may need to free up a large chunk of capital in retirement, whole life insurance is a strong option.
The downside to using a whole life insurance policy as collateral for a loan is that you must make payments on the loan, which are subject to interest, until the loan is paid back in full, or you will face the unwelcome possibility of having your policy involuntarily terminated, at which point you will receive only whatever portion remains after costs associated with the loan have been covered.
The Nature of Your Estate
As those with a robust estate consider the merits of whole life insurance vs term life insurance, it must be noted that term life insurance is often preferable for those who have no need to add to their present estate. Because a huge portion of the cost of whole life insurance is tied up in ensuring the beneficiaries receive payment of some variety upon your death, the cost may be unnecessary if the financial future of your children and grandchildren is already sufficiently funded by other elements of your financial portfolio.
In the same way term life insurance can benefit prospective policyholders with considerable pre-existing wealth, it can also be a wise choice for investors with a detailed financial plan for their retirement and their estate, even if those prospective policyholders don't yet have a remarkable level of wealth.
This is true due to the level of specificity offered by term life insurance; you pay for exactly what you need, exactly when you need it and nothing more. If you have a strong investment portfolio and a plan to continue building upon that portfolio, then it may be more logical for you to save money on monthly premiums and use the extra capital to fund your broader investment strategy.
Though it can be uncomfortable, it is very important to consider the various advantages and disadvantages of whole life insurance vs term life insurance openly with all the parties that stand to be impacted by the decision. Term life insurance offers a low cost, highly specific solution; however, whole life insurance integrates retirement planning and life insurance. You will have to carefully consider what you can afford presently, what resources you may need in retirement, and what you hope to leave for your descendants and your spouse after you have passed.