Term vs. whole life insurance: Your guide to choosing the most suitable policy
Editorial staff, J.P. Morgan Wealth Management
- Term and whole life insurance plans can give you peace of mind, but that’s where the similarities end. Term life covers you for a specific period, while whole life insurance, a type of permanent life insurance policy, gives you lifetime coverage.
- When deciding between term and whole life insurance, it’s important to consider cost, coverage and what you’re trying to protect. Just like saving or investing, your life insurance policy can be an essential component of a complete financial plan.
- Before you decide which policy is right for you and your family, it’s important to understand the pros and cons of both types of life insurance policies to ensure you have the right plan for your family’s needs.
When it comes to life insurance, choosing the right plan can feel a bit overwhelming. Life insurance policies and their premiums (the amount you pay to your insurance provider) vary depending on lifestyle, age, gender, credit and in some cases your driving record.
Understanding the differences between term life insurance and whole life insurance is going to be an important step in making an informed financial decision to match your goals and needs, ensuring peace of mind when protecting your loved ones in the event of something unexpected.
What is term life insurance?
Term life insurance offers coverage for a specific period, typically for 10, 15, 20 or 30 years. During this term, if the policyholder passes away, their beneficiaries receive what’s called a death benefit. Term life insurance is generally less expensive than whole life insurance, and it doesn’t accumulate cash value.
Key features of term life insurance
- Coverage duration: As its name suggests, term life insurance will allow you to pay premiums monthly, quarterly or annually for a defined amount of time. If you happen to pass away during that period, the insurer will pay your family a death benefit.
- Cost and premiums: Term life insurance premiums are usually lower than whole life insurance. The cost remains consistent throughout the term, making it an affordable option for most people seeking coverage.
- Death benefits: This is the amount that will be paid to beneficiaries named under the policy in the event of the policyholder’s death. It isn’t subject to income tax and tends to be relatively inexpensive, enabling you to purchase a large amount of coverage for a low monthly rate. In most cases, the policy remains unchanged for the duration of the term.
- Medical underwriting: When you apply for a term life insurance policy, you’ll undergo a health assessment to determine eligibility and premium rates. This process will likely include answering some health-related questions and taking a few medical tests.
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Term life insurance is often used for temporary needs. For example, you may want to ensure you’re covered until your children graduate college or you pay off your mortgage. The main idea is to provide income for your loved ones to continue their standard of living or to cover a specific expense if you pass while it’s being paid off. Many term life insurance policies can be converted into whole life insurance policies or other permanent policy types if your needs change and you need lifetime coverage.
Remember that term life insurance is temporary, and once the policy expires, the death benefit is gone. Certain term policies will renew on an annual basis, but as a result, your rate will likely increase – and pretty significantly. This policy, more often than not, is purely for risk protection.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance policy that remains for your entire life. The two most common types of permanent life insurance are what’s known as “whole life insurance” and “universal life insurance.”
These types of permanent life insurance policies have a cash value component that grows with time. The cash value can be used while you’re alive, for example, to help pay for an emergency or to supplement your retirement income. Unlike term life insurance, whole life insurance can be borrowed against or used to pay premiums.
Key features of whole life insurance
- Lifetime coverage: Whole life insurance offers coverage throughout the policyholder’s lifetime, as long as premiums are paid.
- Cash value: Part of the premium goes into a savings component, aka “cash value,” which continues to grow over time. This can be a huge advantage because it may be used for loans or withdrawn when necessary.
- Cost and premiums: Whole life insurance premiums tend to be higher than term life insurance because of the lifelong coverage and accumulated cash value.
- Death benefit: This provides a monetary sum to beneficiaries, which again, usually isn’t subject to income tax.
Another feature that makes whole life insurance plans attractive is that they may earn dividends for policyholders. These could be paid in cash and may improve the overall rate of return of the policy’s cash value. They can also be used to provide additional coverage or lower the premiums. While whole life insurance policy premiums are typically higher, they do offer more financial flexibility.
Choosing between term and whole life insurance
Deciding on which type of insurance can be tricky, but it may be helpful to closely consider two facts: how long you think you’ll need the coverage and the cost. Generally, term life insurance is best for families that want affordable coverage for a specific period. Its primary purpose is to ensure there’s income available to meet financial obligations for a specific expense or in the event of something unexpected. On the other hand, whole life insurance makes the most sense for someone who wants lifetime coverage and the opportunity to accrue a cash account that grows over time.
Term vs. whole life insurance
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Understanding the difference between term and whole life insurance
Having a solid understanding of both can help you make an informed decision. Let’s break it down:
Term life insurance:
- May have lower premiums
- Fixed coverage period
- No cash value
- Better for temporary coverage, like income replacement during working years
Whole life insurance:
- May have higher premiums
- Lifetime coverage
- Accumulates cash value
- Better for long-term financial and estate planning
The bottom line: Deciding which life insurance policy is most suitable for you
Choosing between term and whole life insurance may feel somewhat daunting, but understanding the difference between the two is half the battle. Ultimately, deciding which policy fits your situation comes down to your financial goals, the duration in which you’ll need coverage, and, of course, your budget.
If you’re unsure which coverage plan is appropriate for you, you’re not alone. Discussing your specific needs and plans with an advisor can be a helpful step in your path toward deciding. With careful consideration and help from one of J.P. Morgan’s trusted advisors, you can find the life insurance strategy that provides both security and peace of mind for you and your loved ones. Below are some common questions for you to consider.
Common life insurance questions
As you’ll probably guess, it truly depends on your financial goals, needs and budget. Term life insurance is suitable for folks seeking more affordable, temporary coverage, while whole life insurance may be more ideal for those looking for lifetime coverage and a cash value accumulation over time.
Term life insurance may not be worth it for people looking for lifelong coverage or any type of investment component. It doesn’t offer the cash value that whole life insurance does, but it still has benefits in the short term, as mentioned above.
Term life insurance does not accumulate cash value, so it can’t be cashed out.
The biggest disadvantage of whole life insurance is the higher cost compared to term life insurance.
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Editorial staff, J.P. Morgan Wealth Management
