You’ll hear about two of the most common types of life insurance: term and whole life. Both offer benefits, so knowing which one to choose can take time and effort. Ultimately it boils down to cost, length, and individual circumstances. In this article, we will sum up everything you need to know about term life insurance and whole life insurance, so it can help you decide which one to choose

Term life insurance is a type of insurance policy that covers you for death or a terminal illness for a set period of time. The cover period is usually defined for a certain number of years or until you reach a certain age. 

Whole life insurance is a form of permanent life insurance that lasts your whole life, so long as you pay the premiums. It also accumulates cash value that you can withdraw from or borrow against while you are alive. 

Whether you want temporary or permanent peace of mind, life insurance can give you just that. It provides financial support to preserve your way of life or that of your families in the event of an accident, serious illness or death. To choose between the two types you should be guided by your specific situation in life and the things that matter most. Things to ask yourself include:

• How old are you? 
• How good is your health?
• What are your plans for retirement? 
• What are the ages of your children? 
• What is the amount of your mortgage and other debts? 
• What financial concerns do you have about your health? 

Term and Whole Life insurance explained

Term insurance

When applying for Term life insurance, you will need to set a benefit amount, which is the value you want to be covered for. You will also need to select a fixed span of time, anything from 1 to 30 years. Should you pass away or suffer a terminal illness, you or your family will receive a lump-sum payment to help with ongoing living and health costs, funeral expenses or anything else you need, so long as it happens during the fixed term time. If your policy expires, your insurer won’t pay out a benefit as you’re only covered for the time that you pay your premiums. That said, some term insurance policies offer a renewable term or convertible term, which allows you to convert your insurance to a different plan. 

To qualify for term insurance, you may have to take a medical exam or answer a series of questions regarding your health. Premiums can vary based on factors such as whether you are a smoker or whether you have any pre-existing health conditions. 

Pros of term insurance

• Ease – policies are straightforward and exclusions are fairly limited
• Competitively priced – cheaper than whole term insurance with lower premiums when you’re younger
• Larger death payouts – beneficiaries will receive more for the money you pay compared with a whole life policy
• Flexibility – benefits are paid in one go, meaning your family can choose how the money is spent
• Early payouts – benefits can be paid out if a medical practitioner expects you to die within 12 months
• Options – can be converted to another insurance policy 

Cons of term insurance

• Temporary coverage – you need to keep an eye on expiry dates and then re-qualify at the end of the term
• Coverage not guaranteed – It can be difficult to qualify if you have significant health issues
• Growing costs – premiums can go up every time you take out a new term based on age and living factors
• Coverage only – no cash value is accumulated and grown

Whole term insurance

Whole life insurance works by first selecting the amount of coverage that best suits your needs. Once you have a policy, it remains in force for your lifetime or until you stop paying the premiums. Level premiums don’t increase with age, however it’s typically more costly than term life insurance. 

One reason why whole life insurance is more expensive is that it also offers a saving component. Part of your premium payments will accumulate in a cash value amount, which grows over time through interest and can be accessed with a policy loan, withdrawal or surrender of the policy. The money grows tax-free.  

Pros of whole life insurance

• Permanency – as long as you keep up with premiums, your policy can last your whole lifetime
• Predictability – your premiums stay the same, as does your death benefit
• Tax breaks – the cash value grows tax deferred
• Potential loan collateral – it’s possible to borrow against the cash value of your policy

Cons of whole life insurance

• Higher cost – whole life insurance can cost up to 15 times more than term insurance policies 
• Smaller death benefit – your premium will equate to a lower death payout compared to the same premium of a term policy 
• Lack of investment control – if you’re an experienced investor, you may prefer to invest money on your own rather than let your insurance provider do it for you

Choosing between the two 

Both term and life insurance are insurance policies that allow you to leave a cash benefit for your beneficiaries after you pass. The major differentiators between term and whole life insurance is the accumulation of cash value, the length of time in which you are covered, and how much you’ll spend over time. 

When choosing between the two policies, consider your reasons for buying a policy. If you want life insurance to cover the cost of your youngest child going to university, you don’t need the hefty expense of whole life insurance. Term life insurance is much cheaper if you’re only wanting it for a certain amount of time. Another example would be covering a specific debt, such as your mortgage. 

If you want lifelong coverage and a savings trust for your children, whole life insurance is the better choice. Way up each features and choose what’s right for you.