Differences Between Term Insurance and Whole Life Insurance: Term insurance and whole life insurance are two distinct types of life insurance plans that offer different benefits and features for self-employed individuals. Here are the key differences between these two plans.
Differences Between Term Insurance and Whole Life Insurance
Term Insurance | Whole Life Insurance |
Duration: Provides coverage for a specific term, usually ranging from 5 to 30 years. | Lifetime Coverage: provides coverage for the entire life of the insured, as long as premiums are paid. |
Premiums: Generally lower compared to whole life insurance, especially for younger individuals. | Premiums: Generally higher compared to term insurance due to the lifelong coverage and cash value accountability. |
Coverage Amount: Offers a high coverage amount for a lower premium, making it suitable for short-term financial obligations. | Coverage Amount: offers a lower coverage amount for a higher premium compared to term insurance. |
Renewability: Renewables at the end of the term, but premiums typically increase with age and may become unaffordable for older individuals. | Cash Value: Accumulates cash over time, which can be accessed through loans withdrawal. |
Cash Value: Does not accumulate cash value over time. | Investment Component: Includes a savings or investment component that grows tax-deferred. |
Flexibility: Limited flexibility in terms of policy adjustments or loans against the policy. | Flexibility: Offers more flexibility with options like policy loans, withdrawals, and dividends. |
Investment Component: No investment component or cash accumulation. hence premiums are purely for insurance coverage. | Estate Planning: Often used as a tool for estate planning or wealth transfer due to its permanent coverage and cash value growth. |
Suitability: Ideal for self-employed individuals who have short-term financial obligations like mortgages or children’s education expenses. | Guaranteed Death benefit:Â Guarantees a death benefit payout to beneficiaries regardless of when the insured passes away. |
Affordability: Initially more affordable for higher coverage amounts, which can be beneficial for young families or individuals with limited budgets. | Premium Payment Period: Premiums are typically paid for a limited period, such as until age 65 or for a fixed number of years. |
Tax Benefits: Premiums paid for term insurance are generally not tax-deductible. | Policy Loans: Allows Policyholders to borrow against the cash value of the policy at relatively low interest rates. |
Term Conversion: Some term policies offer the option to convert to a whole life policies offer the option to convert to a whole life policy without evidence of insurability. | Dividends: Some lifetime policies pay dividends, which can be used to reduce premiums, purchase additional coverage, or accumulate cash value. |
Term Length Options: Various term length options available to match specific needs and financial goals. | Tax benefits: Cash value growth is tax-deferred, and loans against the policy are generally tax-free. |
Underwriting: Typically requires a medical exam and through underwriting process to determine eligibility and premium rates. | Cost-effectiveness over time: While more expensive initially, whole-life insurance can be more cost-effective over the long term due to cash value accumulation and level premiums. |
Flexibility in ending coverage: If the need for coverage decreases, it’s easier to let the policy expire without significant financial loss. | No expiry: coverage does not expire as long as premiums are paid, providing lifelong protection and financial security. |
Income Replacement: Provides a cost-effective means to replace lost income in case of the insured’s death during the term. | Legacy Planning: Can be used as a tool for leaving a legacy or providing an inheritance to heirs. |
Term Laddering: Can be used in connection with other term polices to create a “term ladder” for staggered coverage needs. | Stable Premiums: Premiums remain leveled throughout the life of the policy, providing predictability and stability. |
No Surrender Value: Since there’s no cash value, there’s no surrender value if the policy is canceled or lapses. | Policy Surrender: Can surrender the policy for its cash value if coverage is no longer needed, through surrender charges may apply. |
Premium Leveling: Premiums typically remain leveled throughout the term of the policy. | Limited Flexibility: Limited ability to adjust coverage and premiums compared to term insurance. |
Policy Expiry: Coverage ends if the insured survives the term and does not renew the policy. | Taxation of Surrender Value: Surrendering the policy may result in taxable income if the cash value exceeds the total premiums paid. |
These points should help you understand the key differences between term insurance and whole life insurance, particularly as they relate to self-employed individuals. It’s important for self-employed individuals to carefully consider their financial goals, budget, and overage needs when choosing between these two types of life insurance. Consulting with a financial advisor or insurance agent can also provide personalized guidance based on individual circumstances.
Read: Why Life Insurance is Important for Self Employed Individuals.