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Term vs. Whole Life Insurance

About half of Americans did not have a life insurance policy in 2022. However, purchasing life insurance can be a wise step toward ensuring financial peace for you and your loved ones. Term life and whole life insurance offer different kinds of income protection, so it’s helpful to understand the best option for your situation. When choosing between term and whole life insurance, you must consider how much coverage you want and can afford.

Key takeaways:

How long you want coverage will affect what you pay as well. Considering these and other concerns can point you in the right direction toward the most suitable protection.

Term life insurance vs. whole life insurance

Understanding the difference between term and whole life insurance can help guide you in choosing the best way to protect your income.

What is term life insurance?

Term life insurance lasts for a specified term or period. This type of policy may run for five, 10, 20, or 30 years. If you purchase a $250,000 policy for a 30-year term and die within the term, your insurer will pay your beneficiaries $250,000. However, if you live past 30 years, your policy will expire with no payout.

A term life policy stays in effect as long as you pay your premium or until your passing. The premium is the money you pay to a life insurance company in exchange for coverage. Your premiums may be paid monthly, quarterly, semi-annually, or annually, according to how you set up payments.

Term life insurance is not designed to build wealth. It aims to replace your income if you are not around to provide for your family.

What is whole life insurance?

Whole life insurance is also meant to replace income should you pass away. It is also called permanent insurance or cash value insurance.

Whole life offers coverage until you reach your policy’s maturity date, which is when the policy ends. This is usually between 95 and 121 years of age. It’s also designed to build cash value. Policyholders can borrow against their policy’s cash value while they are living. Any funds not repaid reduce the death benefit amount.

However, when the policyholder dies, the cash value remains with the insurer. Beneficiaries receive only the death benefit.

Whole life insurance comes in various options with differing levels of financial risk and reward: universal, variable, variable universal, and indexed. Make sure you choose a reliable whole life insurance company that has highly rated financial strength and offers flexible options.

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Factors that affect the cost of life insurance

Insurance companies look at several factors to determine your risk to them. They count on you having a long, healthy, and safe life and paying your premiums on time.

Age

Regardless of term or whole policies, age is the primary factor in determining life insurance premium rates. People pay 8–10% more for every year they age. By age 50 and beyond, they could pay 9–12% more.

Insurers charge more as you age, even with good health, because your risk of death increases. Aging often elevates the risk of developing health and mental conditions that affect mortality, so insurance companies face a greater chance of having to pay out on your policy.

Older individuals can still qualify for a life insurance policy, even into the 80s. However, they will pay substantially more for less coverage than a younger, healthy person.

Gender

Females have a longer average life expectancy than males, so the former group tends to get lower premium rates.

Insurers look at the gender or sex assigned at birth. Gender identity or sexual orientation do not affect life insurance costs or rule out coverage.

You can find a list of major insurers on the Human Rights Campaign (HRC) Corporate Equality Index. These companies are known for their inclusive policies with employees and clients.

Medical history

Health conditions like hypertension, obesity, or diabetes can raise your premium rate because these illnesses may shorten your life expectancy. People with cancer, stroke, dementia, or HIV/AIDS may find it difficult to obtain life insurance.

Using nicotine may increase your rate fourfold. You may be denied coverage if you fail to disclose your use. On the bright side, you may qualify for a lower rate if you stop smoking for at least a year before applying for a policy.

Coverage amount

The larger your policy's death benefit, the higher your premium will be. Riders, such as family coverage or optional add-ons like cancer or accidental coverage, can also cause your premium to go up.

Family health

Insurers may want to know your family's medical history to assess your risk. Hereditary or chronic diseases such as cancer can raise concerns about future health problems, which could increase your rate.

Occupation and hobbies

Life insurance companies also examine your normal activities to determine your risk level. High-risk jobs such as underground miners, construction workers, and commercial fishers will increase your rate. Insurance costs more for adventurous people like scuba divers, mountaineers, and motorcycle racers.

Driving record

How you drive can help or hurt your wallet when it comes to life insurance rates, too. A record of accidents or DUIs indicates riskiness on your part, which increases your risk of dying.

Is life insurance worth the cost?

Life insurance can be a worthy investment if someone depends on you to meet their current or future financial needs. Death benefits can help ease or eliminate the financial worries of survivors with:

  • Final expenses. Life insurance can help pay for funerals, memorial services, burial, and/or cremation. An average funeral costs between $7,000 and $12,000.
  • Outstanding debts. Life insurance benefits can also help cover lingering or unexpected expenses surrounding a person’s death. These might be medical bills, credit card debt, nursing home costs, legal matters, or living expenses.
  • Income replacement. A payout can help your survivors avoid long-term financial difficulties that could arise upon your passing. This could especially be so if you are the sole breadwinner.
  • Potential investments. Insurance proceeds can fund an investment vehicle for those left behind. For instance, this money can go toward your children’s college funds or your partner’s retirement account.

Which is better - whole life or term?

You’ll hear differing opinions about term vs. whole life insurance. The answer depends on your financial goals and affordability.

Term life policies may be suitable for those who only want coverage for a limited time. For instance, a parent might wish income protection for their family until the children can provide for themselves. Some may want to hold a term life policy until they pay off major debts or save for retirement.

Remember that when a term policy ends, you have no coverage. You’ll have to obtain another policy, which would be more expensive because of your older age. Any health conditions you may have developed might increase your premium or disqualify you from some policies.

However, you might be able to save money on your premium if you buy a policy with a smaller death benefit.

Whole life insurance never expires if the premium is paid on time. This can be an advantage when a person becomes ill with a condition that rules out any other coverage. If the cash value builds significantly, it could be a helpful resource in times of need.

This type of coverage is quite expensive compared to term life. The money you spend on whole-life premiums can typically get you more coverage with a term life policy.

With so many whole life insurance vs. term options, shopping for life insurance can be complicated. Discussing your needs with a trustworthy financial advisor or insurance agent may be helpful.

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