When it comes to shopping for life insurance, the decision on whether to get a term or whole life policy is the end-all debate.
Term life insurance advocates say it’s the better option because of its affordable pricing and ample coverage. Others insist permanent life insurance is the way to go because it offers lifetime coverage and many offer the potential to accumulate cash value.
The fact is there are pros and cons to both types of life insurance. When choosing the right coverage for you and your family, it’s important to consider how much of your budget you’re willing to allocate to life insurance coverage and how long you need this type of financial protection.
Term life insurance defined
There’s a reason many experts 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, universal life or even burial 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|
|(Quotes from Haven Life)|
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
- Agree with some term life advocates on the “buy term and invest the rest” strategy
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? Get an estimate for coverage now
Whole life insurance defined
Whole life insurance is a type of permanent life insurance policy. Unlike term life, whole life insurance provides coverage for your entire life and includes a cash accumulation component known as the policy’s cash value that can grow over time. The cash value grows slowly and the gains are tax-deferred, which means you won’t pay taxes on the gains while they grow.
As the cash value accumulation of these policies builds over time, you can borrow against it to help pay the premiums, but the loans or partial surrenders will reduce the total death benefit and cash value, and may result in a tax liability if the policy terminates before your death.
Some whole life insurance policies pay dividends to policyholders. These dividends represent a portion of the life insurance company’s profits.
Advocates for whole life policies say this is a more conservative, longer-term tax-advantaged approach than buying term insurance and investing the rest. These features are why whole life policies can cost anywhere from 5 to 20 times more than a term life policy.
Because of the complexity, buyers should work with a financial professional to select and maintain a life insurance policy that fits their long-term financial goals.
Cost of whole life insurance and other permanent policies
As mentioned above, whole life 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 the same, 35-year-old man in excellent health could cost:
|Face value||Monthly premium|
|(Quotes from State Farm)|
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
Drawbacks 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 death of the insured, not as a vehicle primarily used for cash accumulation, although that feature is available on a whole life policy
Both could be the right answer
A good solution might be a combination of both term and whole life insurance policies. Typically, life insurance is more affordable when you’re young and healthy, therefore, if purchased at the right time, both could be a cost-effective way to cover all your needs.
For example, you could purchase a $100,000 whole life insurance policy that will serve as a lifetime protection set aside for final expenses and your estate. Alongside that whole life policy, you could purchase a term life insurance policy that would cover your family during the time they are most dependent on your income.
For both types of life insurance, when shopping, it’s important to watch for:
- Guaranteed level premiums that remain the same for the duration of the policy (or for life)
- Ratings for the life insurance company that issues the policy. These matter because they indicate the financial strength and claims-paying ability of life insurance companies. We recommend choosing a company that’s highly rated. MassMutual, issuer of our Haven Term policy, is rated Superior by A.M. Best (A++)**
Questions to ask yourself when choosing a policy
Before you can decide whether term or whole life insurance is right for you, it’s important to identify your goals and what you want from a policy.
Here are a few questions to ask yourself as you move through the process:
How much can I afford to pay each month?
If affordability is your highest concern, then that’s one of the clear advantages of term life insurance. With the more expensive life insurance premiums that come with permanent life insurance, it can leave people buying too little coverage if it’s all they can afford at the time.
How long do I want my life insurance coverage to last?
If you only need to pay for coverage while you have financial dependents and not enough wealth to protect them, then term life insurance is a good choice. Coverage is affordable and you only pay for it during the years your family needs it most — until the mortgage is paid off or the kids are adults. If you’re looking for lifetime coverage, then permanent life insurance may be a better option.
Do I want to build cash value I can borrow against?
Cash value is specific to permanent life insurance policies only. Term life insurance can’t be borrowed against. However, some term life insurance policies offer an Accelerated Death Benefit rider in the event of the insured’s terminal illness (this rider in included in the Haven Term policy. The rider allows you to receive an advance of the policy death benefit if you have a terminal illness that is expected to result in death within a time period specific in the policy, usually 12-24 months, depending upon the policy. The proceeds can be used for any purpose, such as paying medical and living expenses. Riders may have fees when exercised; this is true for the Accelerated Death Benefit for Terminal Illness rider on the Haven Term policy.
Am I comfortable with a more complex life insurance policy or am I looking for something simpler? Permanent life insurance may require the assistance of a financial professional to help you determine the type of permanent policy that can meet your needs, the right coverage amount for your budget, and to purchase and manage.
How do I want to buy my policy?
Term life insurance is not only easy to select and manage but at Haven Life, it also can be purchased on your own time, online.
Choosing the right coverage for the people you love
At the end of the day, life insurance is all about protecting your loved ones and the right type of coverage is different for everyone. But, any kind of coverage may be better than none at all.
A good way to figure out how much life insurance you need is by utilizing a free online life insurance calculator to help assess your financial situation. If you’ve decided that term life insurance is the way to go, from there, you can quickly get a free quote, apply online, and if approved, get your coverage started the same day.
If you’re interested in learning more about whole life insurance, our parent company MassMutual has experienced financial professionals who would be happy to assist in the process.
While it’s important to research policies and find the best one for your needs, you should try to not get so caught up in the details that you fail to buy a policy at all. What’s most important is that you’re taking the right steps toward getting the coverage you need to protect your family.
**MassMutual and its subsidiaries C.M. Life Insurance Company and MML Bay State Life Insurance Company are rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of February , 2019, and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.