Term vs Whole Life Insurance

By September 1, 2019 Blog No Comments


There are several different types of insurance policies available to you. Among these are life insurance and term life insurance. These may sound like they are exactly the same thing, but they are not. Semantics are fun. The overarching insurance that most people tend to think of when they hear “life insurance” is whole life insurance. 

Whole life insurance is a type of insurance that acts also as an investment of sorts. Let’s break this down. The insurance side of whole life insurance means that you and your family have a safety net in case of job loss and then having to continue to make payments, such as house, car, education, or even health care payments. Whole life insurance is accessible at any time to you and your family. With whole life insurance, you do pay a premium but that insurance policy accumulates a cash value which you can withdraw whenever you want. Whole life insurance also sits in a tax-exempt account while it builds interest.  Whole life insurance covers you for your entire life and then pays out to your family when you pass away.

Term life insurance is a little bit different in terms of coverage length. You can get term life insurance for just one year, up to 30 years. Most policies will cap you in term length around age 65 or so. For example, right now I am twenty five years old, so the maximum term length I could get would most likely be around 40 years, if there is even a policy in existence that covers that long. Longer term policies tend to cost a little bit more than short term policies. Shorter term policies are also easier to adjust and better if you aren’t quite sure if you know where you are going in your life. Most people experience some sort of quarter life crises, beginning in their mid twenties, where they have absolutely no idea where they’re going or what they are going to do. Short term policies are great because at the end of the term, they are easy to reevaluate and you are not locked into a longer term policy. This will make those reevaluations easier based on health, marital status, and any beneficiaries which may have changed during that time.

With a term life insurance policy, if you die during that time, there is a payout to your beneficiaries. If you pass away after the end of your policy, then there will be no payout to beneficiaries. Term policies are considered good investments to help cover any unexpected costs during that time period as you continue to build up your savings account. Term life insurance policy premiums can also increase, sometimes forcing the policyholder to cancel out of the policy before it has a chance to be of real benefit. The most popular term insurance to get is a twenty year plan. As stated before, term life insurance is typically cheaper than whole life insurance, this is why so many people choose term insurance over whole insurance. However, once that term expires, a reevaluation will need to be done.

 During the term of the policy, premiums typically remain the same, however, with the reevaluation also comes a reevaluation of you and your health. You likely are not in as good of shape at age 50 as you were at age 30, therefore your premiums will increase because it is more statistically likely that something will happen to you. Also, you are closer to life expectancy, meaning you may pass away sooner, also meaning the insurance company would have to actually pay out to your beneficiaries. Again, with term insurance, if you outlive your policy, the insurance company owes your beneficiaries nothing upon your eventual death. That being said, there are some options, however, which will pay you back at the end of the policy. This is called a “return of premium”. The premium is whatever you pay for your health insurance or plan. You, and sometimes your employer, pay into this monthly, yearly, or quarterly, depending on your policy. 

Now before someone came up with “return of premium”, at the end of your policy, that was it, you got nothing back. Naturally, this was fairly upsetting to many people who wanted something to show for the thousands of dollars they poured into this safety net that, thankfully, they ultimately did not need. So many insurance companies came up with that “return of premium”, so that at the end of your policy you get the amount of your premium returned to you. However, as you might imagine, getting a policy with a return of premium, is much more expensive to pay into, than to get a policy without this awesome feature. 

In conclusion: whole life insurance is insurance against accident or death, and it works as investment, nestled in a nice tax-free savings account from which you may withdraw funds at any time. Term life insurance is just that: 1-30 year coverage that will pay out if anything happens to you during that time period. Once your policy term ends (of 1-30 years, or however long you have), then your coverage ends and you and your family receive nothing, unless you have a return of premium built into your policy. 

About Woven Capital

Aaron Hatch is a Certified Financial Planner and co-founder of Woven Capital, a fee-only financial planning and investment management firm that specializes in helping people balance life, work, and community. Aaron has been quoted in various publications, including The Chicago Tribune, US News and World Report, and the Huffington Post among others. Aaron can be reached at aaron@wovencapital.net