Term vs. Whole Life Insurance

Term vs. Whole Life Insurance https://learningcentre.statefarm.ca/insurance/life/select-the-right-life-insurance/ bb3 Mar 21, 2014

By Staff Writer

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When shopping for life insurance, you’ll face several important decisions. One of the most basic may be whether to purchase term life or whole life coverage. Understanding the benefits and risks of each will help you determine which policy best meets your current and future financial needs.

Select the Right Life Insurance

Term Life

With term life, you pay level premiums for a certain period, say 20 years. In exchange the insurer agrees to pay your beneficiaries a stated benefit if you pass away during that time.

Pros

  • You can receive great value. Term insurance can be purchased in large amounts for relatively small initial premiums.
  • You can match terms to needs. Most people purchase term life to provide for their dependents. Once your kids are grown and your mortgage is paid off, you may no longer require extending this coverage.

Cons

  • The policy is temporary. One of the key benefits of term life is also its biggest risk. If your term expires and you still have life insurance needs, you may re-enter the market as an older and potentially less-healthy consumer. That means significantly higher premiums.
  • The benefit may not be paid. Some people don’t like the idea of paying for a benefit their beneficiaries may never receive. If you stay current with your premiums and take care of your health, you’ll receive no reward for outliving your policy.

Whole Life

Whole life insurance provides a death benefit throughout your life. It also includes a cash value component that accrues over time, allowing you to borrow or withdraw funds as needed.

Pros

  • You’ll have lifetime coverage. A whole life policy covers the rest of your life, not just a stated term. As long as your policy is in force when you pass away, your beneficiaries will receive a death benefit.
  • You’ll retain access to your money. A portion of the premiums you pay for a whole life policy become part of the policy’s cash value. After an introductory period, this cash value becomes available to you through loans1 or as a surrender value. You can even report the cash value as an asset when applying for a line of credit. Any way you choose to use it — if you choose to use it — the cash value of a whole life policy provides another level of financial security for your family.
  • You may receive dividends. The insurer may pay dividends to whole life policy owners, depending on the company’s financial performance.2 Although dividends are not guaranteed, the possibility of receiving additional funds is an attractive feature of whole life policies.
  • It can help with estate planning. If you plan to pass on sizable assets, your lawyer or financial planner can help you use the policy’s death benefit to pay any capital gains taxes or probate fees.3

Cons

  • You’ll pay higher premiums. Initially, the whole life policy premiums are higher than comparable term life coverage. However, whole life policies offer lifetime level premiums, while term renewals can involve significant increases in premiums.
  • It requires long-term commitment. Insurers offer several payment plans for whole life policies, but the most common plans require regular premiums for an extended period of time. Policyholders who cannot consistently pay their premiums may see their policy lapse.

Good financial decision-making is based on solid research and sound advice. If you’re in the market for life insurance, be sure to discuss your options with your State Farm® agent, and consult your tax and legal advisor regarding your particular situation.

1 Unpaid loans and withdrawals will reduce the guaranteed death benefit and policy cash value. Loans accrue interest

2 Dividends are not guaranteed

3 Sate Farm® agents do not provide tax, legal, or investment advice. Please consult your tax, legal, or investment advisor regarding your specific circumstances.

State Farm International Life Insurance Company Ltd. 

Aurora, Ontario