You want to protect your family. You know you need some kind of life insurance. But what type of policy should you buy?
The decision seems harder than it needs to be. That’s why we want to explain your options so you can make the coverage decision that’s right for you and your family.
You probably have encountered several different types of life insurance in your search for peace of mind – term life, whole life, universal life, guaranteed issue, accidental death … The list goes on.
The good news is, there are only two types of life insurance that you really need to understand: Term and permanent. And whole life insurance is one of the most popular types of permanent coverage.
The right type of life insurance for you will depend on your budget and how long you want coverage. Whole life insurance policies can cost anywhere from 5 to 20 times more than a term life insurance policy because they cover policyholders over their entire lives, unlike term life insurance, which has a set period of coverage. The cost of coverage may have you asking: Is whole life insurance is worth it?
Good question. It’s important to understand the differences between whole life insurance and term life insurance to find the answer that works best for your loved ones.
Definition of whole life insurance
Whole life insurance is a type of permanent life insurance policy that lasts as long as you keep paying your premiums. Simply put, whole life insurance can cover you for your whole life.
Generally, the death benefit on a whole life policy is guaranteed to go to your beneficiaries, no matter how much time has elapsed since you bought a policy. For example, if you buy a whole life insurance policy when you are 20, your life insurance company will pay a death benefit to whoever is named as your beneficiary, no matter when you pass away — even if you live to be more than 100 years old.
Just like with any type of life insurance, the younger and healthier you are when you buy a policy, the more affordable the policy will be. Because monthly premiums on whole life insurance can be expensive, this detail becomes even more important.
How does whole life insurance work?
Whole life insurance includes a cash accumulation component known as the policy’s cash value that can grow over time. The cash value grows over time and the gains are tax-deferred, which means you won’t pay taxes on the gains while they grow.
Some whole life insurance policies are also eligible to receive dividends. These dividends represent a portion of the life insurance company’s profits.
What exactly is whole life insurance’s cash value?
While the death benefit of a whole life insurance policy can protect your family financially if you were to die (by helping to replace your income, for example), the cash value of a whole life policy accumulates as premiums are paid. You are able to borrow or withdraw some of this growth and use it for any purpose – such as paying premiums, your child’s education costs or your retirement expenses.
Keep in mind that: Loans and withdrawals can impact the total death benefit paid to your beneficiaries and the total cash value of the policy. Additionally, loans may result in a tax bill if the policy terminates before the policyholder’s death.
The idea of building up cash value in a life insurance policy can be an attractive feature to some because it means you have something tangible to show for your premiums beyond the peace of mind the life insurance coverage provides.
The cost of whole life insurance
Whole life insurance policies have significantly higher premiums than a term policy, which is why it’s important to purchase this type of life insurance when you’re young and healthy. Based on a sampling of online life insurance quotes, a whole life insurance policy for a 35-year-old man in excellent health could cost:
Whole life insurance quotes from State Farm:
| Face Value | Monthly Premium |
|---|---|
| $250,000 | $283.84 |
| $500,000 | $561.59 |
| $1,000,000 | $1,117.09 |
30-year term life insurance quotes from Haven Life:
| Face Value | Monthly Premium |
|---|---|
| $250,000 | $30.32 |
| $500,000 | $41.42 |
| $1,000,000 | $76.85 |
Why Haven Life?
The answer to that question is easy (which is exactly how Haven Life makes applying for term life insurance)
Learn moreThe pros and cons of whole life insurance
Whole life insurance might be the right choice if, beyond the primary need for insurance protection, you:
- Seek coverage that lasts a lifetime and won’t expire before you pass away, as long as the premiums are paid according to the policy
- Are seeking a product that offers a cash value component
- Are seeking flexibility with your life insurance coverage from financial protection for your family to being part of your estate planning strategies
And then there are the cons of whole life insurance:
- Life insurance premiums can be high
- This type of coverage is generally more complex than term life insurance and may require the assistance of a financial professional or life insurance agent to purchase
- The primary purpose for life insurance is to protect your loved ones in the event of the death of the insured, not as a vehicle primarily used for cash accumulation, although that feature is available on a whole life policy
How term life insurance compares to whole life insurance
Picking a side you in the term versus whole life insurance debate can be daunting.
There’s a reason many financial planners recommend purchasing term life insurance. It’s one of the simplest and most affordable types of coverage. Term life insurance is characterized by its set term lengths of coverage — typically 10, 15, 20 or 30 years. If you were to pass away within the term length, your beneficiaries are paid an income-tax-free death benefit equal to the policy amount you purchase.
The right term length for you might be until your kids are financially independent, your mortgage or student loans are paid off, or you’ve accumulated enough wealth to cover debts or final expenses. (And, choosing the right term length is very simple with an online term life insurance calculator.)
Once the term length is up, coverage ends or you may have the option to extend it further, but the premium price will be significantly higher since you’ll be older and likely less healthy.
Term life insurance allows buyers to get higher amounts of coverage for a significantly lower cost compared to other life insurance policy options like whole life policies.
Cost of term life insurance
Like any other type of insurance coverage, term life insurance requires a premium to remain covered. For a 35-year-old man in excellent health, a Haven Term policy issued by MassMutual would cost:
| Face Value | Term Length | Monthly Premium |
|---|---|---|
| $250,000 | 20 years | $18.06 |
| $250,000 | 30 years | $30.32 |
| $500,000 | 20 years | $23.34 |
| $500,000 | 30 years | $41.42 |
| $1,000,000 | 20 years | $40.67 |
| $1,000,000 | 30 years | $76.85 |
The pros and cons of term life insurance
Term life insurance might be the right choice if you:
- Are looking for a low-cost option for financially protecting your spouse and children
- Are seeking to replace your income to help your partner cover the day-to-day bills if you were no longer around
- Need coverage until your children are financially independent
- Need a policy to help pay specific cosigned debts, such as a mortgage or student loans
- Have, or plan to have, substantial money saved for retirement
Drawbacks of term life insurance:
- Affordable coverage only lasts for a predetermined length of time versus a lifetime.
- With a traditional term life insurance policy, there is no cash value that you can borrow against or is guaranteed to increase over time
- Like auto insurance, you only get a benefit payment if something bad happens.
Ready to get started with term life insurance? Get an estimate for coverage now.
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“I'm so happy I chose Haven Life for my policy needs. The entire process was quick, easy, stress-free and convenient. Their customer service is top-notch.” - Sandra
Learn moreBuy the right life insurance to financially protect your loved ones
When shopping for life insurance, don’t let all the options distract you from financially safeguarding the most important people in your life.
Proceeds from a life insurance policy can help your family continue to meet ongoing financial obligations like the mortgage, shared debts, childcare, schooling and many other day-to-day bills we all have. This is the case with any type of life insurance — whether it’s term or whole life insurance.
The most important thing is to find the right coverage for you will fit into your budget and will provide you with dependable coverage when your loved ones need it most. That’s what makes life insurance worth it.
Tom Anderson is Haven Life’s editorial director.
