Term vs. Whole Life Insurance: What’s the Difference?
November 9, 2022 | Jessica Richter
When deciding on a life insurance policy that meets your needs, it is helpful to know the options and how they differ. Here, we will review how term life insurance and whole life insurance policies work, and what the benefits may include.
Term Life Insurance
- Lower premium
- Set coverage period
- No cash value
- Guaranteed death benefit
Term life policies will pay out the guaranteed death benefit to the beneficiary upon the insured’s passing during an established timeframe. With term policies, you pay a lower premium for a larger amount of death benefit. Each month’s paid premium guarantees the death benefit, which is determined at the initial enrollment.
If your policy lapses due to nonpayment, you often have a grace period to keep the policy in place. If the policy lapses and the grace period ends, you will forfeit that death benefit and the premiums paid, and your policy ends.
Whole Life Insurance
- Higher premium
- Whole lifetime coverage
- Builds cash value
- Guaranteed death benefit
Whole life insurance policies offer coverage for the insured’s entire length of life. These policies guarantee the death benefit to the designated beneficiary upon the death of the insured, no matter when he or she passes away. However, you will end up paying a higher premium for a lower death benefit. Whole life policies are typically 5-15 times the cost of a term policy. This is because, in a whole life policy, you have the ability to access cash value.
What Does Cash Value Mean?
One of the main differentiating features of a whole life policy is that, unlike a term policy, it builds a cash value based on a set interest rate. When you pay monthly premiums, a portion of the amount will go towards securing that guaranteed death benefit within the policy, and the remainder builds as cash value for later use.
The accrued cash value grows tax deferred. It is available to you as the policy owner for a loan or withdrawal. You are required to pay ordinary tax on the growth of your gains if you choose to take out a loan against your policy. If you surrender your policy at some point, you will acquire the cash value at that time as your payout.
Upon the passing of the Insured, the death benefit is paid out in its entirety, less any outstanding loans or cash value outstanding.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance. Universal insurance is a flexible premium policy under which the policy owner may change the death benefit from time to time and vary the amount or timing of premium payments. Premiums are credited to a policy account from which mortality charges are deducted and to which interest is credited.
Understanding the different features of each kind of life insurance policy type offered can benefit you as a policyholder. At Twin City Underwriters, we provide peace of mind when making these decisions. We are here as your partner for life as you navigate the process of life insurance. Please call 651-488-0172 or send us a message to learn more or to discuss life insurance options for you.