Term Life vs. Whole Life Insurance – How to Decide

Trying to decide whether to purchase term life or whole life insurance? Although term life insurance is the most common selection, which one is right for you? After you understand the difference, it will be easier to select a policy.

What Is Term Life Insurance?

Term life insurance provides coverage for a specific period or term. Coverage periods are usually offered in increments of five years—usually between ten and 30 years. When the term ends, you can renew the policy, convert to a permanent policy, or let the policy expire.

  • Premiums – Your age, health history, lifestyle, the term length, and the amount of coverage you want will affect your premiums. Term life insurance monthly premiums are less expensive than permanent life insurance premiums.
  • Payout – Your beneficiary is guaranteed a payout if you die during the term of your policy.
  • Cash value – Unlike permanent life insurance, term life doesn’t build cash value.

What term length should you choose?

Consider a policy that provides coverage until your dependent children, if any, have completed college and live on their own. At the end of the term, if you have fewer dependents, you can lower your coverage amount and save money on premiums. Or you can select a term that lasts until you retire if you’re leaving your retirement income to a beneficiary and can reduce your life insurance coverage.

What Is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance. It provides coverage for your entire—or whole—life. Your beneficiary will receive a payout when you die. And the policy includes a use-it-or-lose-it cash savings account that accumulates over the years as you pay premiums.

  • Premiums – Your age, health history, lifestyle, and insurance coverage amount will affect your premiums. Whole life insurance monthly premiums are higher than term life premiums—five to fifteen times higher.
  • Payout – If your premium payments are current, your beneficiary is guaranteed to receive a payout.
  • Cash valueWhole life insurance builds cash value over time. It’s a tax-deferred “living benefit” for you. If you die, your beneficiary will receive the death benefit, but the cash value will return to the insurance company. 

It takes time to weigh the facts and decide which policy is best for you. Our post, Whole Life Insurance Policy – 5 Questions to Ask First, gives details on what you should consider before selecting whole life insurance.

How Much Life Insurance Do You Need?

Think about how much life insurance is needed to replace your income and care for your beneficiary and dependents if you die.

  • Some experts recommend that you purchase life insurance that equals ten to 12 times your annual income.
  • Other experts advise that you multiply your annual income times the number of years left until you retire.
  • If you have a stay-at-home spouse, consider the cost of caring for your children or home if your loved one predeceases you. Get life insurance for your spouse, too.
Infograph to highlight the differences between term and whole life insurance; from Hunt Insurance of Raleigh

Term Life vs. Whole Life – Five Questions to Ask Yourself

Take another look at the differences between term life and whole life insurance. Ask yourself the questions below. Confirm your reasoning with a licensed insurance agent who can help you compare your options, costs, and the long-term effects of the type of insurance you choose.

  1. How many family members will depend on my income for my entire life?
  2. Do I have debt that limits what I can afford to pay for premiums each month?
  3. What is the value of my assets and estate? Am I subject to an estate tax that I can pay with the tax-deferred cash value of a whole life insurance policy?
  4. Will I have enough savings to self-insure at the end of my term life policy, or will I need to renew or convert it?
  5. Do I have valid reasons to pay higher premiums for whole life insurance that builds cash value? Or can I invest elsewhere and get a higher return?

Start the conversation with Hunt Insurance of Raleigh-Durham, NC. Contact us today.

How Do You Calculate the Cash Value of Life Insurance?

Hands of a man working on a laptop; perhaps to calculate cash value of his life insurance

Interested in calculating the cash value of your life insurance? If you have permanent life insurance, a portion of the premiums you pay gradually accumulates in a savings account. Whole, variable, and universal life insurance policies are types of permanent life insurance that accumulate cash value. How can you determine the cash value of your policy?

Calculating the Cash Value of Life Insurance

You can calculate your life insurance’s cash value by adding the total of the premium payments you’ve made for the policy and subtracting fees, commissions, and expenses charged by the insurer.

The insurance company uses your premium payments in three ways:

  1. Death benefit (the payout to your beneficiary)
  2. Insurance company’s fees and profits
  3. Cash savings account

The distribution of your premium payments means that your permanent life insurance policy builds cash value over time. But knowing the cash value of the policy is essential. If you don’t use it, your beneficiary will receive the death benefit when you die, but the cash value will return to the insurance company.

Factors that Affect the Current Cash Value of Your Life Insurance

Multiple factors affect the current cash value of your policy.

  • Total of premium payments – The sum of your premium payments depends on how long you’ve had the policy. If you’ve only had the policy a few years, your premium total won’t be significant.
  • Your age when you acquired the policy – According to LIMRA research, 40 percent of life insurance policy owners wish they bought a policy at a younger age. When you’re younger, a large portion of your premium payments will go toward the cash value of your policy. As you age, it costs more for insurers to provide coverage for you, so a large portion of your premium goes toward your policy. For example, if you acquired the insurance at age 50, although you’ve had it for 20 years, most of your premiums are used to insure you, and cash accumulation will be limited.
  • Rate of return on your investment – The growth of the cash value of your life insurance depends on the type of policy, the terms of your insurer, and the rate of return on the investment. Ask your insurance company for a cash value chart to see the projected appreciation rate.
  • Loan balances – If you’ve already borrowed from your insurance policy, an outstanding loan decreases the cash value.

You can gather the data and try to calculate cash accumulation on your own. But it’s easier to sign up for an online account on your insurance company’s website to access the amount. Or you can contact the insurer and request the cash value of your policy.

What Can You Do with the Cash?

As mentioned, cash accumulation is a use-it-or-lose-it feature. As the funds build, some of the ways you can use them include:

  • Increase the death benefit for your survivors
  • Pay the premiums for the policy
  • Borrow money with the understanding that an outstanding loan balance decreases the payout to your beneficiary
  • Make a withdrawal, which might affect the death benefit total
  • Supplement your retirement income

Is a Cash Value Policy Right for You?

If you’re exploring your life insurance options, several factors can help you determine if a cash value policy is right for you and your family.

  • If you’re in a high-income bracket and maxed out of other tax-deferred accounts, a cash value policy is an option for tax-deferred savings.
  • It’s unlikely that cash value will exceed the premiums paid if you surrender the policy within the first ten years.
  • Permanent life insurance costs an average of six to ten times more than term life insurance. But if you choose term insurance, at the end of the term, you’ll need a new policy, or you might be able to convert to a permanent one.
  • Cash value is separate from your death benefit. If you don’t use it, it’s returned to the insurance company.

At Hunt Insurance of Raleigh, NC, we’ll explain your options for permanent life insurance with cash value and how they compare with term life insurance. We will thoroughly answer your questions with easy-to-understand language that helps you make an informed decision. Start the conversation by calling us or completing our contact form.