Term insurance vs. Whole life insurance: Which is better?

Are you deciding between term and full life insurance? Are you unsure which one will best fit your needs? Understanding the fundamental distinctions between these two types of policies will allow you to make an informed decision. Here's a detailed comparison of term and whole life insurance.

∙  Coverage duration

Term insurance covers the insured for a definite time, which is between 10 and 40 years. If the policyholder dies within this term, the nominee is paid the death benefit. Whole life insurance, in contrast, provides coverage for the life of the policyholder, usually up to the age of 100. What this means is that your family is shielded all the time, regardless of the time that you die.

∙ Premium costs

The cost of paying for term insurance is relatively cheaper than that of whole life insurance. This is because term insurance only offers a face amount or cash value in the event of the insured’s demise. Whole life insurance costs more than term insurance because it entails an investment part that builds up cash value over time. If you want to know how much premium you should pay according to your preference and budget, you can try using a term insurance calculator.

∙ Investment component

Term insurance does not have any saving feature; it just offers life coverage. Whole life insurance, however, combines life coverage with an investment component. Some of the premium paid is invested and the policy accumulates cash value that can be borrowed or surrendered later.

∙  Policy simplicity

Term insurance is quite simple and is not complicated in any way. It is a policy you pay regular premiums for a certain number of years, and in the event of your death within this period, the nominee receives the agreed amount. Whole life insurance is more complicated because it has an investment aspect, which entails knowledge of how cash value builds up and the ways it can be utilised.

∙ Flexibility

Term insurance plans are usually more versatile when it comes to the term and amount of coverage. The policies are flexible and you can decide to take a term that will cover your working period or until the children are young adults. Whole life insurance is less flexible as it provides coverage for your entire life and comes with an investment element.

∙  Maturity benefit

Term insurance does not offer any endowment benefit if the policyholder survives till the end of the policy period. The premiums paid are not refundable. Whole life insurance, on the other hand, builds up cash value over the years and policyholders can get maturity benefits in the form of cash value if they cancel the policy.

∙ Purpose of the policy

Term insurance is suitable for those who seek cheap insurance policies with substantial coverage for a particular period. It is best used for meeting short-term financial needs such as repaying a loan or as a source of income replacement. Whole life insurance is ideal for people who require insurance coverage throughout their lifetime with an investment component that seeks to provide for the beneficiaries.

∙ Premium payment term

Term insurance is another type of insurance where the premiums are paid right through the term of the policy. In whole life insurance, the premiums are paid until the policyholder attains a specific age (for example 100 years) or for a specified number of years (for instance 20 years) as provided for in the policy.

∙ Cash value accumulation

Term insurance does not have any cash value associated with it. The premiums paid are strictly for the pure risk of death occurring within the term. Whole life insurance accumulates cash value in the policy, which grows on a tax-deferred basis. This cash value can be borrowed or withdrawn as needed, which offers flexibility in terms of funds.

∙ Tax benefits

Term and whole life insurance also have tax implications under Section 80C of the Income Tax Act where people can claim deductions on the premiums paid. The amount received as a death benefit is also exempt from tax under Section 10(10D). Also, the cash value of whole life insurance is allowed to grow tax-free, which may give it some tax benefits.

∙ Policy loans

Term insurance does not provide an opportunity to borrow money against the policy because it does not build up cash value. Whole life insurance policies enable one to take a loan against the cash value accumulated, making it a source of funds for emergencies or other needs.

∙ Financial goals

Term insurance is ideal for those who want to provide for certain expenses like home loans or children’s education during a specific time. Whole life insurance assists in term planning as it offers a savings tool and a bequest for the beneficiaries.

∙ Cost efficiency

Term insurance is more cost-efficient for obtaining high coverage at a low premium, making it accessible for individuals on a budget. Whole life insurance is more costly compared to other types of insurance as it combines insurance and savings for a lifetime.

∙ Conversion options

Most term insurance policies come with a conversion provision that enables the policyholder to transform the term policy into a whole life policy without going through the medical examination. This allows for the transition to lifelong coverage if circumstances about finances change. Whole life insurance does not need such conversion because it already provides coverage for the entire life of the policyholder.

∙  Risk coverage

Term insurance is purely risk protection, where the insurance company pays only the sum assured if the policyholder dies during the term. Whole life insurance offers protection and cash accumulation which will meet the policyholder’s needs at any time in his/her life and even after his/her death through the cash value.

∙ Death benefit

Term insurance has only one major product feature, which is the death benefit, and it is usually larger for the same price as compared to whole life insurance. Whole life insurance pays the face amount plus the cash value at the time of death and is beneficial to the policyholder’s beneficiaries in two ways.

Summary

Whether to opt for term insurance or whole life insurance depends on your financial objectives, requirements, and capacity. Term insurance is cheap but provides high coverage for a stipulated period, which is suitable for meeting temporary needs. Whole life insurance offers permanent coverage with an investment aspect, which grows cash value as time goes on. Comparing the duration of coverage, premium rates, investment factors, ease, and flexibility of policies, you will be in a position to make the right decision depending on your financial planning horizon.