March 13, 2021

Why Term Life Insurance is Better Than Whole Life

Read more about Term Life Insurance

Term life is better because it's cheaper and easier to understand. But is it really best for everyone? And why is whole life a bad idea?

Term life is ideal if your main concerns are:

  1. Affordability
  2. Replacing income during your working years

Term life insurance costs less because it only lasts for a limited period of time (5-35 years). If you die during that period, the payout can support your family. Big expenses that depend on your income (like mortgages) can be covered in your absence.

Whole life provides lifelong coverage, but at nearly 15x the cost. Plus, the investment account that comes with whole life earns less than other investments.

Still, there's no one-size-fits-all policy. Find out why term would be a better fit for your life, plus the special reason why whole life might be worth a look.

Why Term Life Is Probably the Best Fit for You

Term life insurance is a smart choice for most people, but why is that the case? If any of these reasons apply to you, term life is probably the best fit.

  1. If dying in your working years would cause serious trouble...
    Imagine you bought a house, just got married, or started a family.

    During your working years, your family's stability depends on your income. Without you, your partner would struggle to cover these expenses alone.

    Term life insurance is designed to prevent this. You can buy a policy for the number of years you plan to work or pay off a mortgage. If you pass away, the payout can replace your income and maintain your family's quality of life.

  2. If price is the main thing standing in your way…
    You know you want life insurance, but budgeting for the monthly premiums is tricky.

    If that sounds like you, term life is your best chance to get affordable coverage. Because a term life policy is only active for a limited time, the premiums are much less than whole life.

    Plus, if you're young (35 or below) and in good health, you'll get an even better rate. That's because the company sees insuring you as less of a "risk."

  3. If you want to buy a policy quickly with no fuss…
    Buying whole life insurance is a weeks-long process.

    In addition to countless questions, it also requires a medical exam to measure how healthy you are.

    Because term life isn't a lifelong policy, the process of buying it is much easier.

    Term life is usually the only policy that can be bought online, no medical exam involved. Some companies even use computer algorithms for the underwriting, which means you can get covered instantly.

Why Whole Life Could Be Worthwhile

Whole life insurance isn't right for everyone, or even most people. But there are some reasons why it might be worth considering.

If your family will pay a lot in estate taxes…
Say you're leaving behind a high-value illiquid estate to your heirs (like a property worth more than $12M). In all likelihood, they'll have to pay hefty estate taxes.

Now say you buy a whole life policy and place the policy in a trust. With this, you can devote some of your payout to cover the estate taxes.

You don't need a trust to pay estate taxes. But since you control how the trust is spent, you can guarantee the taxes get paid. Otherwise, it's up to your beneficiaries to use the payout responsibly.

Whole life insurance is better for estate planning because it pays out no matter when you die. With a term life policy, there's no guarantee that you'll die within the term. In that case, the payout goes unused.

Difference Between Term Life and Whole Life

With term life, your family receives the payout only if you die within a set period of time (you decide how long that period is).

Whole life provides the payout no matter when you pass away. It's in effect for as long as you pay the monthly premiums.

Whole life also comes with an investment account. This is sometimes called the "cash value." A portion of the premiums you pay is put into that account. This is part of the reason why whole life is much more expensive than term.

The account value grows over time by earning interest at a rate set by the insurance company. After some time, you can withdraw or borrow money from the account.

An investment account might sound like a nice bonus on top of your life insurance policy, but it's not all it's made to be. The returns you earn aren't worth much until you've had the policy for at least 20-30 years. Plus, you can earn more by investing the money elsewhere, like in an ETF or mutual fund.

Bottom Line

In general, we recommend getting a term life policy. It can cover you for as many years as your family depends on your income. The money you save by choosing term over whole life can be put into more lucrative investments.

Ultimately, though, life insurance is a very personal decision. If your family can afford higher premiums and want to prioritize estate planning, consider whole life.

Holly Zorbas is a guardian of content and community at CreditDonkey, a life insurance comparison and reviews website. Write to Holly Zorbas at holly.zorbas@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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