Understanding Different Types of Insurance: Term Life vs. Whole Life

January 28, 2019

My life insurance agent told me a joke once: A doctor informs a patient that she only has a few months left to live. Distraught, she asks her doctor what she should do. “Marry a life insurance agent,” was the doctor’s reply. “Why?” asked the startled patient. “Will I live longer?” The doctor replies, “No. But it will feel like a lifetime.”

I wasn’t terribly wowed by the punchline either. However, instead of soliciting a rib-straining guffaw, I think the joke is meant more to be a commentary on maintaining life insurance coverage. How odd, but necessary, that we spend a lifetime paying for life insurance coverage that only becomes financially viable after death?

You Need Insurance – But Which Type?

Too many Americans go without life insurance. Only about 60% of Americans have a life insurance policy. Most are woefully underinsured. One out of every five Americans believe they don’t have enough insurance. About a third of insured Americans only have insurance through an employer. Additionally, most Americans don’t get life insurance because they overestimate the cost.

Much more problematic, many Americans don’t apply for life insurance because the application process intimidates them. Specifically, they don’t know what type of life insurance they should apply for. Two of the more well-known types of life insurance products is term life and whole life.

Term Life Insurance

Term life insurance is a kind of life insurance product that only offers coverage during a predetermined term of coverage. For example, you can buy a term life policy that covers you for 5 years, 10 years, or 25 years. You pay a locked-in premium that won’t increase during the term of coverage. A 20-year term life policy worth $250,000 could cost a healthy 40-year old about $20 or $30 a month, depending on the issuer.

However, most term life insurance policies do not accrue cash value over time. Also, when you buy a term life policy, you are essentially gambling that you will die sometime within the terms of coverage. If you die one day after a 20-year term of coverage, no death benefits will be paid out. You will have to start all over with a new policy. Term life insurance policies are one of the most affordable kinds of insurance products, but you are essentially betting the length of your life against the coverage term.

Whole Life Insurance

A whole life insurance policy lasts for a lifetime. As long as you pay your monthly premium, they will stay in force for the rest of your life. The cash value of a whole life policy gains value over time. You can leverage it against a loan, cash out for a lump sum payment, or convert it into a monthly supplemental income source. You can also use it to pay the tuition for a loved one. Depending on the issuer, you can use or convert the cash value in a variety of ways.

Whole life insurance is much more expensive than term life. An average whole life policy premium for a 40-year old could be $130 a month, though it can easily be more. Whole life offers much more benefits that term life insurance, which a mitigating factor in the cost.

Consult a Professional

You may want to talk to a life insurance agent or broker to find the kind of coverage that best suits your needs. Also, keep in mind that some term life insurance policies can be converted into a whole life insurance policy later on. If you need insurance to protect your family’s financial future, make sure you get coverage that suits your personal circumstances.