Difference Between Term Insurance and Whole Life Insurance

differences between term insurance and whole life insurance policy

Among the different life insurance policies, two popular ones are term life insurance and whole life insurance plans. Term insurance gets you coverage for a specific period. In case the insured person expires, the beneficiary receives the policy benefit. On the contrary, a whole life insurance plan provides life-long protection. 

If you are wondering about whole life insurance vs term life insurance policy and which one you should opt for, keep reading to learn more details.

Table of Contents

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What is a Term Life Insurance Policy?

Term insurance plans have been fairly popular among different life insurance policies. This is because the term plan provides financial security to an insured person's family in case of any unfortunate incident. It also comes with an affordable premium rate.

The plan provides life coverage to an insured person for an extended period based on the duration or ‘term’ opted for. The policyholder decides the assured sum when buying a term insurance plan.

What is a Whole Life Insurance Policy?

As its name suggests, this insurance plan provides life-long coverage, which goes on throughout the validity of the plan. Therefore, choosing a whole life insurance plan protects your family financially during an unfortunate incident.

Apart from an insurance facility, this insurance plan also provides an investment benefit. Since a sufficient amount of money is collected in the form of premium payments, this plan enables you to use that money if you are in need.

Difference Between Whole Life Insurance and Term Life Insurance Policy

The major differences between term life insurance and whole life insurance policies are discussed in the table below:

Factors Term Life Insurance Plan Whole Life Insurance Plan
Premium The premium for term life insurance plans is lower than whole life insurance. Comparatively higher than term insurance plans.
Coverage Period In general, the coverage period ranges between 10 years and 30 years. It provides lifetime coverage.
Permanent Coverage No permanent coverage is offered. It offers permanent coverage.
Premium Remains constant or increases sometimes. Always remain constant.
Cash Value No cash value is involved Cash value is present, and it accumulates in due course of time.
Dividends Term life insurance does not provide any dividends. Depends on the insurance provider.
Health Exam It is usually required but also depends on the insurance amount. Yes, a health examination is necessary for whole life insurance plans.
Favourability It is favourable for someone who is opting for a short-term plan. It will be suitable for someone looking for a long-term plan.
Use in Estate Planning Not commonly used. Used.
Bonuses Term insurance plans do not provide any bonus. In case of a whole life insurance plan, you will get bonuses.

Differences in Cost of Whole Life and Term Life Insurance Policy

Whole life insurance is much more expensive than term life insurance because it provides lifetime coverage and also funds. Whole life premiums are level and fixed to represent the insurance company's commitment toward issuing benefits throughout the policyholder's entire lifetime.

On the other hand, term life insurance has lower initial premiums. Hence, it is relatively cheaper, especially for the younger generation, but the renewal after the term expires may mean huge increases in premiums.

In the final analysis, though term life insurance may be cheaper in the short run, whole life represents a long-run investment to achieve financial security and wealth accumulation.

Pros of Term Life & Whole Life Insurance

Term Life Insurance Whole Life Insurance
Life insurance term plans are perhaps the least expensive option. Whole life insurance provides a benefit for the whole of your life. In other words, the beneficiary will receive a death benefit regardless of the time when you die.
You can purchase it from the insurance company itself or through websites that assist you in finding the correct term plan. The cash value also accrues in whole life insurance, continually increasing with each premium payment made by the policyholder.
Term insurance provides the freedom of premium payment policy. This means you can pay monthly, quarterly, or annual premiums, depending on your preference. Whole life insurance usually has fixed premiums for the entire lifetime. The premium does not increase as years pass by or as your health declines over time. 
Under this option, the policyholder can select how the pay-out should reach the nominee immediately after his/her death. Most whole life policies are designed to pay dividends based on the insurance company's performance. These dividends may take any number of forms, including, but not limited to, premium reductions, additional coverage purchases, or cash value accumulations.
Term insurance enables customers to add extra riders, such as Critical Illness riders or riders of Accidental Death Benefits, for additional protection. This will then mean that there's additional cover some policyholders might want to buy, and an added fee is applied. The entire cash value build-up of your whole life is tax deferred. Hence, taxes on your earnings are only made when withdrawn. Your beneficiaries also receive the death benefit free of taxes.
Under Section 80C of the Income Tax Act, 1961, term insurance provides a tax benefit whereby the paid premiums can be claimed to a limit of 1.5 Lakhs and then rebated.  

Cons of Term Life & Whole Life Insurance

Term Life Insurance Whole Life Insurance
Premiums tend to be high since they are based on the policyholder's age, with older individuals facing higher costs. The whole life insurance plan is quite complicated, primarily because it offers space for cash value, the dividends accruing, and premium payments made through contributions toward the policy. 
These insurance policies offer maturity benefits, i.e., bonuses and more, but under term insurance, there is no such facility. The cash value of whole life insurance does grow, but the rate of growth is usually much lower than that for other investments, such as stocks or mutual funds.
The term insurance can be terminated at the policyholder's choice. If the insured member of the term stops paying the premium, the policy will automatically be closed. The surrender value, however, may differ from one insurance company to another. Not all companies will offer you surrender value. When you opt to cancel your whole life before a certain time, you may be subjected to surrender fees that could significantly reduce your cash value.

Term Life Vs Whole Life Insurance - Which is Better?

If you are wondering which is better, term or whole life insurance policy, it purely depends on your financial security needs and goals. Suppose you require life insurance for a considerably short term (while your objective is to nurture your minor children and provide them financial security). In that case, choosing term insurance will be a better choice as its premium is quite affordable.

On the other hand, if you want permanent coverage that will continue throughout your life, considering a whole life insurance plan is ideal. Whole-life policies also help you enjoy several survival benefits, like tax-free cash value accumulation.

 

After the above discussion, you can understand how term insurance differs from whole life insurance policies in terms of their types. Also, you must have understood whole life insurance vs term insurance plans and which one should suit you. Make sure to go through the available policies with diligence and opt for a plan to meet your financial goal while ensuring the security of your family.

FAQs about Whole Life Insurance and Term Life Insurance

What are the major benefits of whole life insurance?

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Whole life insurance offers lifetime coverage with fixed premiums and a cash value that accumulates over time. This can be very attractive in the long term for achieving financial security and, hopefully, borrowing against the policy. In addition, the death benefit is usually tax-free to the beneficiary.

Can I have multiple-term insurance policies?

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It is indeed possible to have more than one term life insurance policy. Coverage amounts and terms can be tailored to different financial needs or goals. For example, you may want coverage for different debts or for different parts of your life.

What is the perfect age to avail whole life insurance?

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The best age to purchase whole life insurance is usually a person's 20s or 30s, when he or she is likely younger and healthier and, therefore, still faces lower premiums. The earlier that one is enrolled in the plan, the more one can quickly set aside lower rates as cash in the whole life plan over the lifetime of the policyholder.

What are the merits of term life insurance?

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Term life insurance offers very affordable premiums and flexibility in the choice of the duration of coverage or period you want to be covered for, leaving the owner with the possibility of providing heavy death benefits towards specific financial obligations. The time is, therefore, temporary as far as mortgages or education costs are concerned.

Is term life insurance better than whole life insurance?

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Whether term life insurance is better than whole life insurance depends solely on particular circumstances and goals.

Term life is significantly cheaper for those who want to purchase a life insurance policy for a short period of time, perhaps until all the children of the working parent are off to college. Whole life is more likely used for longer-term planning or wealth accumulation.

At what point should you switch from term to whole life?

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You could move from term to whole life coverage depending on changes in your financial situation, for example, where you want life coverage for the rest of your life or if you want to start saving cash value. This will become favourable at the end of a term, especially because you will need coverage.

What happens to whole life insurance at the end of the term?

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Whole life insurance does not have any term. It lasts for the policyholder's entire life, provided the premiums are paid. At death, it pays a death benefit to a beneficiary.

What is the maximum duration for term life insurance policies?

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The term life insurance policy usually lasts from 1 to 30 years. Most insurance companies, however, can renew it. The real length will be determined by the insurance chosen and its particular policy option.

Is whole life insurance costlier than term life insurance?

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Yes, whole life insurance is generally more expensive than term life insurance, mainly because it provides lifelong coverage and has a cash value component. The cost is greater because the issuer will assume the cost of providing benefits for the full term.

Is it possible to hold both term life and whole life insurance simultaneously?

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Yes, you can buy both term and whole life policies concurrently. This is a 'combination' strategy where you would cover any current needs with term insurance while at the same time building up cash value with whole life insurance.

Under what circumstances could term insurance be preferable to whole life insurance?

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Term insurance could be a better decision for you if you have a short-term obligation, you live on a shoestring budget, or you need coverage for when some life stages will occur, such as raising children or paying off a mortgage.

Can whole life insurance provide coverage for long-term care?

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Whole Life basically offers a death benefit and cash value, but sometimes, there may be riders or options with long-term care coverage, so you could use the death benefit to pay for care.

Is it possible to access the cash value of a whole life insurance policy?

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Yes, it is possible to withdraw cash from a whole life insurance policy by way of loans or withdrawals. Outstanding loans reduce the death benefit and must be repaid, or interest added.

Is it necessary to have both term and whole life insurance policies?

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Depending on your financial objectives, you are not necessarily required to have both term and whole life insurance policies. Having both options offers a mix of long-term security and affordable term coverage for specific situations.

Is it possible to convert term life insurance into whole life insurance?

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Yes, most term life insurance has conversion options that can be converted into whole life insurance without a medical exam, usually by a specified date.

Can whole life insurance be converted to term life insurance?

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Switching from term to whole life insurance is far less difficult than vice versa. Most insurers recommend that you not decrease your coverage. However, if you have enough cash value, you might be able to switch to a term plan.

Can I withdraw cash from either a term or whole life insurance policy?

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You can withdraw cash from a whole life insurance policy, which features a cash value component, but you cannot withdraw cash from a term life insurance policy, which has no cash value.

Are term life and whole life insurance policies subject to taxes?

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Generally, death benefits payable under both term and whole life insurance are tax-free to the beneficiaries. However, growth in the cash value of whole life insurance is tax-deferred until withdrawn.

What other forms of permanent life insurance exist apart from whole life insurance?

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The other permanent types of life insurance include universal, variable, and indexed universal life. These also offer a wide range of features, including flexible premiums or investment options.

What are the drawbacks of term life insurance?

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The demerits of term life insurance include no acquisition of cash value and the possibility of increased premiums at renewal. If the policyholder survives the term, they will not receive any benefits, and getting coverage later could be more expensive or challenging.

What is the disadvantage of whole life insurance?

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The main downside of whole life insurance is that it is more expensive than term life insurance, which can be too much for some people. Also, the policy can be complicated, and the cash value growth is often lower than other investment choices, which may appeal to only some policyholders.

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Disclaimer

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  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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