What Is Whole Life Insurance?

May 23, 2019

Need Advice Comparing Term vs. Whole Life Insurance?

Shot of a young couple meeting with a financial planner in an office

According to LIMRA’s Insurance Barometer 2018, 59% of Americans own life insurance and 90% believe a family’s primary wage earner needs life insurance. A more recent survey by LendEDU uncovered similar findings and some others.

LendEDU found that:

  • 54% of those surveyed have life insurance,
  • 83% believe their life insurance policy is worth the cost, and
  • 33% indicated they do not fully understand how their policy works.

One area of particular confusion for many is whether to purchase term life or whole life, how to define each, and compare them based on premiums and other factors. Obtaining a quote for either of these life insurance products is pointless without this basic understanding.

Differences between Term and Whole Life Insurance

When considering a life insurance purchase, you must first understand the basic differences between term and whole life insurance. Simply put, term life provides insurance for a specific term (e.g., 10, 15, 20 years) and is intended to provide temporary coverage, while whole life offers lifetime protection, as well as a cash value that grows as long as the policy premiums are paid. Term life premiums typically remain fixed for a set time period and whole life premiums remain level over the insured’s lifetime. When it comes to cash value and growth, term life provides none, whereas whole life offers a guaranteed cash value growth and the ability to access cash from the policy, if needed. The cash value in a whole life policy can also be enhanced through dividends and enables the insured to build savings through its tax-deferred status. For both term and whole life insurance, there are death benefits provided and each allows these benefits to be transferred to the insured’s beneficiaries on tax-free basis.

Should You Purchase Term Life or Whole Life Insurance?

Assuming you understand the important role life insurance plays in providing financial protection, but are uncertain which type you should purchase, here are some prevailing thoughts. Many financial professionals believe having both types of coverage is valuable, if you can afford it, while others suggest that when you purchase it, your life stage, and of course, your financial circumstances are factors to weigh when deciding on term vs. whole life insurance. For instance, the younger you are, the less costly either policy will be. Further, your gender plays a role. Women, who actuarially have been shown to have longer life expectancies than men, will generally have lower insurance costs than men.

What’s your occupation? If you are in a high risk position, your rates will be higher than others in lower risk jobs. How’s your health? If you are a smoker or suffer from a serious or chronic medical condition, your premiums may be higher than an individual without these health problems. Where you live can also be a factor with different rates for different states based on various actuarial data.

Besides age when purchasing insurance, probably the biggest consideration is your household’s cash flow. If you have enough money to purchase a whole life policy when you are still in your younger years (i.e., 20s, 30s), that’s probably a good way to go. On the other hand, if you are already in the middle ages or older, with a family, mortgage payments, kids to put through college and household expenses that don’t leave much for a higher premium policy, term life might be the way to go.

Term Life vs. Whole Life Cost Comparisons

Let’s look at these examples of the premiums for a term life policy vs. a whole life policy based solely on an individual’s age and gender. Note, these examples are for illustration only purposes.

For a $250,000 Whole Life Insurance Policy

Female Age 25 (good health, non-smoker)
Estimated Monthly Premium: $160.00
Estimated Cash Value at Age 65: $200,000
Estimated Death Benefit at Age 65: $450,000
Female Age 40 (good health, non-smoker)
Estimated Monthly Premium: $260.00
Estimated Cash Value at Age 65: $130,000
Estimated Death Benefit at Age 65: $345,000
Female Age 50 (good health, non-smoker)
Estimated Monthly Premium: $420.00
Estimated Cash Value at Age 65: $81,000
Estimated Death Benefit at Age 65: $290,000
Male Age 25 (good health, non-smoker)
Estimated Monthly Premium: $180.00
Estimated Cash Value at Age 65: $225,000
Estimated Death Benefit at Age 65: $425,000
Male Age 40 (good health, non-smoker)
Estimated Monthly Premium: $330.00
Estimated Cash Value at Age 65: $160,000
Estimated Death Benefit at Age 65: $70,000
Male Age 50 (good health, non-smoker)
Estimated Monthly Premium: $530.00
Estimated Cash Value at Age 65: $105,000
Estimated Death Benefit at Age 65: $310,000

For a 20-Year Term Life Insurance Policy with a $500,000 Face Value
(Source: www.valuepenguin.com)

Non-Smoking Individual
Age 25
Estimated Monthly Premium: $22.83
Age 40
Estimated Monthly Premium: $35.00
Age 50
Estimated Monthly Premium: $89.79

Note: Smokers typically pay twice to three times as much, depending on their age.

There is more to consider when deciding on what type of life insurance to purchase, over what term (in the case of a term life policy) and at what face value amount. An experienced insurance professional can help you make the best decision for you and your family. For more information, visit: www.amalgamatedlife.com