The complete guide to term life insurance versus whole life insurance for your family

In 2021, nearly half of US adults didn’t have life insurance. And, this percentage grows to over 63% when looking at parents who don’t have coverage for their households.

But a comprehensive insurance policy can represent a lifeline for your family if the unexpected happens. 

From reimbursing final expenses to replacing the breadwinner’s salary, a life insurance policy can make a difference in the impact of an unpredicted death on the family’s finances and quality of life. What’s more, choosing wisely between term and whole life insurance is just as impactful. 

Here’s what you need to know to make the right choice for your family. 

Term life insurance

Term life insurance is the simplest type of insurance. With this kind of time-bound policy, you can benefit from coverage during a specific term, as long as you are able to keep up with your monthly payments. Your insurance payments will depend on when you took out your policy, as there is variance in term life insurance rates by age.

Simply, if your policy offers coverage for 10 or 20 years, your beneficiary will receive your death benefit if you die within this term. If your death happens outside of this term, your beneficiaries will not receive the monetary benefit. 

For parents, this type of life insurance is especially suitable when the term matches the length of their financial obligation towards other members of the family. For example, a 20-year policy bought upon the birth of your child will cover them until they no longer rely on you financially.

After the set term, the policy expires. At this point, you might consider renewing it or converting it into a permanent or whole life insurance policy. 

The benefits and drawbacks of term life insurance

Term life insurance has one obvious drawback: it expires at the end of the term. But there are also some other disadvantages to consider, including:

  • It does not offer cash value and cannot be used to build long-term wealth. 
  • Changes in your health status can prevent you from renewing the policy
  • You will only be able to convert it to permanent insurance with the same insurer

At the same time, thanks to its simplicity and time-bound effectiveness, term policies are far cheaper than whole life insurance options. 

The guaranteed death benefit they offer, cheaper premiums, and affordability make them an accessible choice for younger families. 

For example, a female in her 30s will pay an average premium of $28 for a 20-year term life insurance, against a $3,802 fee for the same $500,000 whole life insurance alternative.

Whole life insurance

Whole life insurance is another type of life insurance policy that is not limited to predefined terms. In turn, as long as the policyholder keeps up with monthly payments, the policy will never expire, thus paying a death benefit to your beneficiaries regardless of when you die. 

Another important feature of whole life insurance is that it provides cash value to its policyholder. As you pay your premium each month, a portion of the payment is redirected into a “cash value” account, which grows over time. 

Once you have reached a certain threshold, you can borrow against the account or withdraw cash. This investment component allows you to build long-term wealth and works in combination with your tax strategy.

The benefits and drawbacks of whole life insurance

Whole life insurance policies are highly popular – and for more than one reason. 

Firstly, these policies are often “level premium”, meaning that your monthly costs will remain the same throughout the policy duration. Additionally, insurers offer a guaranteed annual interest of 1-2% of the cash value, and any loans you take out against your account are tax-free, just like your death benefit. 

At the same time, whole life insurance policies come with drawbacks worth considering. 

These include:

  • Permanent policies are 5-15 times more expensive than term life insurance policies for the same benefit
  • Any loan you take against your cash value will reduce the death benefit your beneficiaries will receive by the amount borrowed (unless it’s paid back).
  • If you no longer need the policy or you can’t afford it, you will face a surrender charge of around 10% of the cash value.

Choosing between term and whole life insurance – what to consider

When applying for life insurance, it is important to take into consideration the different features of the various policies, as well as your personal circumstances. 

Here are some tips to make a smart decision when looking to financially protect your family:

  • Term life insurance policies are more affordable but won’t cover you throughout your life. Oppositely, whole life insurance coverage comes with no expiration date, but it is more expensive. And, if you fail to pay it, you might face fees as high as 10% of your cash value.
  • If you need to cover a member of your family until they rely on your financially, term life insurance might be simpler and more affordable
  • If you are looking to optimize your estate planning, whole life policies offer tax benefits and investment features.
  • Term policies are suitable for those families needing coverage right away or while saving for a whole life policy.
  • Whole life insurance is recommended for those with a lifelong financial obligation (such as children with disabilities) or looking to make the cash value or death benefit part of the inheritance. 

Work with a specialized life insurance advisor

Each family’s financial and personal circumstances are unique. When adding this to the complexity of today’s life insurance policies, it is easier to see the benefits of hiring an insurance or financial advisor. 

Since a life insurance policy can impact your whole family’s present and future finances, quality of life, and stability, working with an insurance broker before submitting an application can truly be invaluable.

Photo by Luca Nicoletti