What's the Difference Between Term and Whole Life Insurance?

When I talk with employees about their life insurance, one of the most common questions I get is what is the difference between term and whole life insurance? Even when people know the difference between the two, they sometimes get the names of the policies backward. They might call term life, whole life by mistake and vice versa. I thought today, I'd talk about the differences between the two primary types of life insurance to help clear things up or provide you with a refresher if you need it to help bring you back up to speed.

Term Life Insurance Is Good For A Certain Amount Of Time And Then It Expires

Term life insurance is life insurance that lasts for a specific term, or time period. If you die while the term is in force, it will pay your beneficiary the face amount. Most people die after the term expires. If you die after it expires, then there is no death benefit.

Other important facts about how term life insurance works:

• Term life insurance can be bought for different time periods While it's possible to get one year term, most people buy 5, 10, 15, 20 or even 30 year term.
• A lot of people rely on group term life insurance The most common term is basic group term life insurance which lasts while you are part of a group like at work. Read more about the problems with group term life insurance.
• You could pay every premium and never collect It is possible to outlive your term insurance even if you pay every premium. Most people outlive their term life.
• No cash value Term has no value to it so if you end the policy, you don't get anything back from the insurance company.
• Term life insurance is very cheap when you are young The premiums for term life are always cheaper than for the same amount of whole life insurance. When you are young, term life is dirt cheap if you are healthy.
• The premiums are cheaper than whole life because statistically you won't collect Because most people outlive their term insurance, you get a lot more for the money since the insurance company knows you'll probably outlive it.
• You can buy a lot more term life insurance than you would for the same premium for whole life insurance Term insurance is a great way to get a lot of insurance for very little money. It's cheaper than whole life. But eventually the term either ends or the premiums skyrocket forcing you to let it go.

NOTE: Insurance companies have really good data on how long people live and they aren't stupid. They know just how long to make the term insurance last before you'd need it and therefore can offer more death benefit that statistically speaking they know they won't have to pay. Even though the premiums are cheap and it looks like you'll get a ton of money, in reality, you'll most likely outlive your term insurance and receive nothing.

RESOURCE: Check out the different types of term life insurance.

Whole Life Insurance Lasts For Your "Whole Life"

Whole life insurance is guaranteed to last your whole life and pay a death benefit no matter when you die and no matter how old you get. Unlike term insurance, whole life insurance does not expire.

Here are some other facts about how whole life insurance works:

1. Guaranteed payout If you buy a guaranteed whole life policy, the payout is guaranteed when you die. You can't outlive it as long as you pay your premium.
2. Premiums are fixed for the life of the policy Whole life policies have a fixed premium for the life of the policy.
3. Guaranteed cash value Unlike term life insurance, whole insurance builds cash value. If you have had the policy long enough and then decide to get rid of it, you'll most likely get some money back.
4. You get less whole life insurance than you do for term life insurance for the same premium Whole life premiums are higher but that's because the insurance company guarantees they will pay if you die no matter how you live.

A WORD OF CAUTION: Many people think they have a whole life policy that's guaranteed for life when in fact they might own a variation of whole life insurance called universal life or variable life. Countless people lose coverage because those policies don't have the guarantees that whole life provides. My mom had a policy like that which she thought was going to be good for life. But, when she turned 65, they tripled her premium because the cash value in the policy was insufficient to support it for life. She had paid every premium when due and still lost her life insurance. My guess is that the vast majority of people who buy life insurance on their own through an agent and think they bought a whole life policy that's guaranteed for life. Unfortunately, more times than not, they actually have a variation such as universal life and are at risk of losing their coverage when they get older.

RESOURCE: Check out my article about types of permanent life insurance.

Which Is Better - Term Life Insurance Or Whole Life Insurance?

Once people know the differences between term and whole life insurance, usually the next question many people ask is which one is better and which one should I buy? Honestly, the best life insurance to have is what's in force when you die. Since that's an unknown, it's difficult to plan for.

I personally believe that both types of life insurance are good and you should actually have a combination of both. I think it's a good idea to have a bunch of term life insurance, even though you'll probably outlive it, and then have some whole life insurance that you can count on after the term expires to pay for your burial and some other expenses.

The main thing with guaranteed whole life insurance is this. It's a guaranteed unilateral contract which means as long you pay your premiums when due, the insurance will pay 100 percent of the time.

Unfortunately, most term life insurance expires worthless and most people who buy whole life cash it in. This means that neither pay when people really need the money. For those that buy whole life insurance, they either get talked out of it by agents to replace it with term insurance or they run low on cash and cash it in for the cash value.

Conclusion

Now that you know the difference between term and whole life, you should have a better understanding of how the two types of life insurance differ.

Personally, I'm a big believer insurance that has a guaranteed payment when you die.

How do you feel about term and whole insurance? Let me know in the comments below.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the red button just below or click ask for a proposal.