If you’re in the market for a new life insurance policy, it’s probably been considered that you had options for both whole and term life insurance. However, what is the distinction between full life insurance and term insurance? While both offer financial assistance for death benefits, there are several critical differences between these types of policies. Below, we’ve contrasted the differences between term life and full life to assist you in determining what form of life insurance is appropriate for you and your family. We also provided some tips on how to determine which option is better for you in your specific situation.
What is the distinction between term and full life insurance?
Two significant differences exist between term life insurance and whole life insurance: the length of the policy and the value of the cash benefits.
- Life insurance duration: With term life insurance, you will have a specific maximum duration of coverage with a term. Conversely, permanent life insurance, which is also known as whole life insurance, is still relevant for your entire life (as long as you pay the premiums).
- Cash value advantage: Term life insurance benefits are directed: you leave behind a beneficiary. However, with whole life insurance, part of the premium is dedicated to the death benefit, while the other portion is deposited into a cash value account that can be accessed while still alive.
Let’s discuss the benefits and drawbacks of each policy type, as well as the difference between term and whole life insurance.
All life insurance
Whole life insurance is a form of permanent insurance that covers you from the time you buy a policy, until you pass away. Whole life is a traditional form of life insurance that has a set premium rate and pays a set amount to the beneficiary when you pass away. Additionally, whole life insurance also has a vehicle that saves cash.
Here is information that is important regarding whole life policies:
- Cash value of part of your premium: Your premium is split between a savings account and a credit card. You can take out the cash or borrow it, while still living, and utilize the funds for whatever you want. However, the cash value is typically only available if you’re still alive, and it will not be considered part of your death benefit.
- Value to beneficiary: When the insured passes away, their designated beneficiary receives the entire value of the insurance (also called the death benefit), minus any remaining cash value. As is common knowledge, any remaining cash value following the death of the beneficiary is typically not considered part of the beneficiary’s death benefit.
- Schedules for payment: Many insurance companies offer the option of paying a whole life premium every month, quarterly, annually or semi-annually. These types of policies include you as long as you continue to pay the premium.
- Dividends: If you purchase whole life insurance from a mutual company, you may be entitled to receive dividends, based on the company’s financial performance. Re-paying these dividends can enhance your cash flow more rapidly.
- Prequalification: Depending on the policy, you may be required to provide your medical history via a health questionnaire or take a medical exam.
- Price: Whole life insurance is typically more expensive than term insurance because it covers you for the full duration of your life and includes benefits that are cashed out.
| Policy features | Pros | Cons |
|---|---|---|
| Cash value | Borrow from or draw on the growing amount | Must be paid back or will be deducted from the death benefit |
| Payment schedule | Monthly, quarterly, semi-annually or annually | May be subject to additional fees for breaking up the payment throughout the year |
| Value to beneficiary | Face value paid to beneficiary regardless of age when you pass away (if over 18) | Any outstanding loan against the cash value could reduce the death benefit amount |
| Dividends | Could earn dividends based on company’s financial performance | Dividends are not guaranteed and are only available from certain companies |
| Prequalifications | May not require a medical exam | Coverage could be expensive depending on medical history |
Term insurance
Term life insurance is available for a set duration, such as 30 years. After this time, your insurance will be terminated, unless the policy is re-renewable or convertible. If this is the case, insurers typically require you to activate these options before the term is over (if the policy doesn’t automatically renew). Keep in mind that policies that are re-created typically have a new rate. When contrasting term insurance versus whole life insurance, the cost of term insurance is typically less significant.
Think about the following factors that influence term life insurance.
- Conditions: Term life insurance typically has a set monetary value and will cover you for a specific duration, typically between five and 30 years. The 20-year term policy is the most popular, according to the Insurance Information Institute.
- Medical necessities: To enroll in a term life insurance policy, you may need to answer questions about health or take a medical exam. Some policies include a renewable option that allows you to renew the policy for a different term every year, typically without taking a new medical exam, but the rate will be based on your current age.
- Age restrictions: Many term life insurance policies have an age restriction, which is typically around 80. If you want to maintain insurance through age 65, the insurance company might only provide you with a term of 15 years.
- Premiums: Term insurance companies calculate the premium based on a few factors, including your age, health during the time of application or renewal, and expected life span. Term life insurance is more affordable for younger individuals and healthier individuals than whole life insurance. However, the typical premium for a term policy increases as you age.
- The policy’s level of protection: When purchasing a term policy, you may need to choose between a level term or a decreasing term. With a flat rate term, you will pay the same amount of money every month and have the same level of insurance for the duration of your policy. With a diminishing term, the death benefit is reduced over the course of the term, typically at a monthly or annual rate. Many individuals choose a term policy that decreases over time to protect themselves from a mortgage.
- Convertible and premium term policies: Some term life policies are convertible, which allows you to transition from a permanent policy to a regular exam after a set period of time. A policy with a feature that returns the money you paid after the term is over, but with a higher premium to compensate for the extra money.
| Policy features | Pros | Cons |
|---|---|---|
| Terms and medical requirements | Terms typically range from five to 30 years and usually involve medical questions, but possibly a medical exam may be skippable | Optional renewable term feature can be expensive, health history may require a medical exam |
| Age limits | Usually available to most adults up to age 80 | Seniors may not qualify for term and renewable options may be limited |
| Premiums | Typically much cheaper than whole life for same death benefit | Health concerns could lead to higher premiums |
| Decreasing term policies | Can provide coverage for a mortgage | Premiums stay the same, but death benefit decreases |
| Convertible and return-of-premium term policies | Able to convert term to whole life or get a portion of premium returned after term expires | Whole life is more expensive than term life and uses current age when converting, return-of-premium is provided at higher costs |
Term insurance versus full life insurance
Whole life and term life insurance have one significant attribute in common: they both provide a benefit for death when you pass away. For instance, if you have a $100,000 term life insurance policy and you pass away during the term, your beneficiary will receive $100,000.
Similarly, if you take a $100,000 whole life insurance policy and continue to pay the premiums until you pass away, that policy will pay $100,000. With both term life and whole life, the death benefit is typically tax-free and can be utilized for any purpose.
| Why choose term life insurance | Why choose whole life insurance |
|---|---|
| Usually has cheaper premiums | Cash value and potential for dividends |
| Good health history could waive medical exam | Medical exam isn’t always required |
| Can typically purchase much higher death benefit amounts | Option to take a loan against the cash value |
| Flexible choice of terms | Life-long coverage |
Age
Also, term and whole life policies have a similar approach to age. With both types of life insurance, you will pay a lower cost if you take out a policy while you’re still young. If you delay filing until you are in your 60s, you will pay a higher rate or may not be qualified because of a medical condition.
Duration
When contrasting term insurance versus whole life insurance, the two types of policies have a number of significant differences. Term life only benefits you for the duration of the term, while whole life continues to benefit you until the end of life’s circumstances are most commonly followed. However, some term life insurance policies can be maintained after the term is over, if the policy is convertible or can be renewed, as long as you fulfill your policy’s requirements for conversion or renewal. Many term policies also have a new rate at the end of the term, but the new rate is always the same.
Prequalification
The procedure of prequalifying for a term insurance policy or a whole life insurance policy is based on a few principles, the first of which is the company’s underwriting process, your health as a whole and the amount of coverage you want.
For either term life or whole life, you’ll need to reveal some information about yourself to the insurance company in order to determine if you’re eligible. This may involve a comprehensive health survey that includes information on your age, medical history, family medical history, surgeries and recreational activities. Alternatively, the exam could be conducted in person or via phone with a representative from the insurance company’s life insurance.
Some life insurance companies make the process of prequalifying easier, just requiring questions about your age, gender and overall health. However, it’s important to remember that term life and whole life policies that don’t require medical testing are typically more expensive. If you’re in decent health and can successfully complete a medical exam, your premium probably will be less expensive if you followed this route.
Savings advantages
The savings account attribute of a full life insurance policy differentiates it from regular term insurance. Whole life policies have a higher cash value, whereas term life insurance has no. Some term life insurance policies have a premium return mechanism, which allows you to collect a portion of the premiums you paid, but not all policies have this feature.
Which is more advantageous: a term or full life insurance contract?
Selecting between term life and whole life will be based on your objectives and necessities. Here are some factors to consider when deciding on the type of life insurance that is right for you.
Preparing for your future
It’s crucial to choose a life insurance policy that matches your financial goals and needs in the present. To figure out how much life insurance you need, you might want to utilize a tool like the life insurance calculator to give you a rough estimate and consider talking to a life insurance professional or certified financial planner, both of which will ensure you choose the appropriate policy for you.
Opportunities for growth
If you want a policy that allows your money to increase, a whole life insurance policy is probably the best option for you. Many whole life insurance policies have a cash value that is constant over time, and can be taken out while you are still alive. Other policies that provide coverage for the whole life can be found that potentially yield annual income, this can increase your monetary value in addition to the current cash value. Be aware that the majority of cash accounts will not be considered part of your benefit during death.
Other types of life insurance that are permanent have the potential to increase your income. Universal life policies are similar to whole life policies, but the funds are deposited in a cash value account and earn money based on the market’s interest rate. After your universal life insurance policy is mature, you can also change the payment amounts using the cash value of your insurance.
Also, variable life insurance policies have a permanent component, but they offer additional flexibility by letting you invest the savings portion of your policy in bonds, money market funds or stocks. However, variable life policies can have a greater danger because you could reduce your cash value and death benefit if your investment is unsuccessful.
Life stages
The most appropriate form of life insurance for you is also dependent on your current life stage. For example, if you’re young and want a low-cost policy, term insurance is probably a good option. If you take a flexible approach to policy, such as variable life, and make good investments, you can probably expect significant returns by the time you retire.
Another option: you can utilize term life insurance to enhance your life’s protection during crucial moments. For example, you could purchase a policy that covers the cost of college for your daughter if you die before she graduates from college.
