Term vs. Whole Life Insurance: What’s the difference?

Are you overwhelmed with so many types of insurance in the market? One first step is to investigate Term Life Insurance vs. Whole Life Insurance.

Term Life Insurance and Whole Life Insurance – What are they?

Term life insurance only covers a death benefit within a certain period (referred to as “term”) that you decide previously. For example, you decided to buy a 10-year term life insurance when you are 30. Your beneficiary would get the death benefit should you pass away before 40 (after ten years).

Whole life insurance is a permanent insurance policy. It includes a predetermined death benefit and a cash value. Policyholders will have to pay a fixed monthly premium as they live.

Whole life insurance is much higher than term life insurance, and this might mean a lot if you calculate the money according to years. Whether to buy whole life coverage or term coverage will depend on your financial circumstances and personal needs that might benefit you the most.

Comparing benefits between Term Life Insurance and Whole Life Insurance

Cash Value

Most salesmen will mention this when you are hesitant to choose between term life insurance and whole life insurance. This is something that is not included in term life insurance that makes whole life insurance so attractive. 

‘Premium‘ in whole life insurance is composed of three parts:

• One part flows into the insurance company’s operating costs and expenses
• Another portion goes into the death benefit
• The final amount will become a form of investment, known as the cash value

Cash value is attractive because:

• It is your money, and it will grow according to a plan that the insurer offers. The cash value can be considered as a slow yet safe way of investing. 
• Your earned money from the cash value isn’t taxed. You can take out some money from it as long as the amount you take is less than what you paid previously.
• For example, you’ve paid $50,000 for your policy and earned a cash value of 62,000. If you want to take out $60,000, the 10,000 (excess of $50,000k) will be taxed.
• As the cash value grows up to some extent, you can use it to pay for the premiums.
• You can make a loan from your own cash value. This is extremely helpful when you’re in urgent need of cash. One good news is that it is tax-free.

Cash value is not attractive to some people because:

• The price is too high. Some people cannot afford it.

Take a quick calculation from Compulife: Alex is a 46-year-old man. He is a non-smoker with regular health. If he buys a policy of $500,000 from Sun Life, he will have to pay $1,025 annually for a 20-year term policy or $10,040 annually for a whole life policy. The cost of buying a whole life coverage is five times higher than that of a term life insurance policy. 

• It has a cost opportunity. Cash value takes time to accumulate. Instead of paying for the cash value and waiting for years, people can use this money to invest instantly elsewhere, such as in the stock market or real estate, which might be more profitable. 

Let’s look back at Alex’s example. The difference between his term life insurance and whole life insurance is $9,015 in a year. If he invested $9,015 each year and got a 10% annual return, he would get $516,330. This is a fortune, and he can still buy a 20-year term insurance policy with just $20,500. 

• Although the loan from the cash value is tax-free, you must pay for the interests. Interests from banks or third parties might be cheaper in some cases.

Death Benefit

While your beneficiary will receive a death benefit with whole life insurance upon your death, this might not be the case with term life insurance if your term already expires. In other words, your death benefit will disappear when the term ends, and you receive nothing. This sharp difference between term life insurance and whole life insurance might dissuade some people from buying term coverage because they don’t want their money to go to waste.

Time Benefit

Some people don’t buy whole life insurance simply because they cannot or don’t want to pay continuously for the coverage forever. On the other hand, term life insurance is more short-term, and both have pros and cons. One thing for you to decide is to think about when you might need a policy.

For example, Laura is a single mom with an eight-year-old son. She has quite a low salary, so she cannot afford whole life insurance. She worries that her son would have no financial means were she to die prematurely. Laura decides to buy a ten-year term insurance policy so that if the worst case were to happen, her son would receive the death benefit that helps him survive until he gets eighteen.

One thing to note is that many people might take advantage of the time benefit of term life insurance. To be clear, they would first buy a term life insurance when they cannot afford a whole life insurance policy and convert it into a whole life insurance policy later when they have more money.

This might be a clever idea if your term life policy is lapsing, and you’ve reached your old age. At this stage, term-life insurance can become expensive due to your age. Thus, you might want to convert it into whole life insurance so that you can obtain both the cash value and the death benefit.

In brief, term life insurance and whole life insurance have both pros and cons. If you don’t have lots of money now and/or you’d better invest your money somewhere else while worrying about your dependents, you’d better choose term life insurance. But if you wish for a tax-free investment and ensure a definite death benefit, you might opt for whole life insurance.

Frequently Asked Questions