What Are the Differences Between Whole Life Insurance and Term Life Insurance?
What is the purpose of buying a life insurance policy? When you set up a life insurance policy, you're trying to cover the risk of dying too soon. If you pass away, your beneficiaries will receive compensation, which they can use to cover your debts and achieve any other financial goals you haven't yet reached. This could include paying off the mortgage or funding your kids' college tuition. By understanding the differences between whole life insurance and term life insurance, you can determine which one best helps you achieve your individual goals.
What Is Whole Life Insurance?
Before describing whole life insurance, it is critical to be aware of the reason you are purchasing a policy. Two primary approaches exist with whole life insurance; a basic whole life insurance policy and a high cash value whole life insurance policy.
Basic whole life insurance varies from term life insurance in at least two ways. First, as long as you continue making premiums, a whole life policy won't expire. Second, the cash value grows and can provide an additional source of income for you or your beneficiaries. These are the two main differences between whole life insurance and term life insurance, but there are a few other things to note.
If you're also looking for an instrument to build cash and strengthen your personal finances, a whole life policy is the way to go. However, when you choose a form of permanent life insurance, your premiums will be more expensive than term life premiums.
Watch this video to learn more about starting a whole life policy:
Benefits of Whole Life Insurance
Your premiums do not go up with a whole life insurance policy. Life insurance companies that offer this type of coverage split your premium. Part of it goes toward your death benefit, while the other part goes toward a growing cash balance. There is an interest rate associated with the cash balance for further growth.
Most types of permanent life insurance also allow you to borrow money from the policy. Loans against your life insurance policy do not incur taxes. Many companies offer whole life insurance policies, including American Express.
Disadvantages of Whole Life Insurance
This type of insurance is more expensive than comparable term policies. Further, this form of permanent life insurance may incur surrender charges if you let it lapse in the first couple of years. Beneficiaries receive the death benefit minus any outstanding loans. Therefore, if you don't have a chance to pay off any money you borrow, it can reduce the amount your survivors receive.
What Is High Cash Value Whole Life Insurance?
A whole life policy purchased with the intention of maximizing the cash benefit still has a life insurance benefit that remains intact forever as long as the policy does not lapse. The key difference with a high cash value policy is that the policyholder can choose where their money goes. Money may be directed toward to primary areas:
- Premium: This purchases the death benefit first and eventually builds cash value. This is not attractive to someone interested in the cash value.
- Paid-up additions (PUA) rider: This is a rider that accelerates the cash value growth of a policy. For example, if an individual contributes $1,000 to a PUA rider, they see the majority of that show up in cash value immediately. This is money that begins to earn a dividend and is accessible to the policyholder.
Additionally, one has maximum flexibility when purchasing a high cash value policy. Instead of having lifetime payments, the policyholder can pay into a policy for a few years and then stop altogether. This is extremely common among individuals that have a large amount of money in cash or savings. They can move money into a high cash value life insurance policy over a few years and then watch it grow.
Watch this video to learn more about maximizing cash value:
Benefits of a High Cash Value Policy
The core benefits of the cash value are safety, liquidity, and tax-free growth.
- Safe: Money in a cash value life insurance policy will have a guaranteed rate ranging between 2-4%. The net growth on these products typically produces between 3-5%. This is consistent if things are going very well — or very poorly — in the stock market and economy.
- Liquid: Money can be accessed anytime without penalty.
- Tax-free: Provided a taxable event is not triggered, such as a MEC or a lapse, the money can be accessed tax-free.
It is common to see wealthy banks, corporations, and individuals purchase high cash value policies as they are positioning it as an alternative savings asset. That said, it is available to everyone. This type of product requires the agent you are working with to have enough knowledge on policy design and be willing to work for minimum commission; maximum cash value for the policyholder will often result in a minimum commission for the agent.
What Is Term Life Insurance?
Term life insurance is the simplest to understand. You buy this policy for a specific period of time. For example, you can purchase a 20-year term life policy. The term can vary greatly from five years to 30 years or longer. If you die during the term of the policy, your beneficiaries receive a death benefit. However, at the end of the term, the policy expires, and so does the coverage.
You can better grasp the differences between whole life insurance and term life insurance by comparing the pros and cons of each.
Benefits of Term Life Insurance
The cost of term vs. whole life is much cheaper. It's easy to understand and lasts for a certain term. So, it will protect your family if you die before a certain age. Once your kids finish college or begin working full-time, they don't rely on you as much as before. However, you can still protect your family while your kids are dependent on you.
Disadvantages of Term Life Insurance
Most term policies require a medical exam, which can increase your premiums if you have certain health conditions. If you want a higher death benefit or coverage for a greater number of years, it will cost you more money. Also, because of the limited term, you cannot use a term life insurance policy as a way to build wealth or save on estate taxes.
Now you know the differences between whole life insurance and term life insurance. So, you can confidently choose life insurance that meets your family's needs. For more information, including how to maximize your whole life insurance policy, contact IBC Global, Inc. today!