Term life insurance vs. whole life insurance: What's the difference?

Making sure the needs of your family are met in case the unexpected happens is a smart financial strategy. When you’re choosing a life insurance product — term life insurance and whole life insurance — understanding the differences will empower you to identify which is best for your budget and your family’s needs.

In a nutshell, term life provides coverage for a set amount of time and your family gets a payout if you pass away during the term. Whole life insurance pays out regardless of when you die, and lets you borrow or cash out on the accumulated cash value.

To help you choose, the following will cover what makes these products distinct and their pros and cons.

What is term life insurance? The basics

Term life insurance is a straightforward and inexpensive way to offer coverage for your family.

• Choose terms lasting 10, 20 or 30 years.
• Your family gets a specific payout if you die before the end of the term
• Monthly payments — the premiums — stay the same throughout the term.
• If your coverage needs change, you can upgrade your coverage — usually for a higher monthly payment.

How much coverage is enough for your family?

The rule of thumb for term life insurance is a payout that’s 10 times your annual income. That means if your annual salary is $45,000, you’ll be looking at a $450,000 term life insurance policy. But you can choose other configurations, depending on your family, how long they need the coverage and what your monthly budget can cover. If you and your partner just bought a house, you may want a payoff that covers the remaining mortgage. Or if you’re expecting a child, a 20-year term will see them into adulthood. Your friendly insurance agent can help.

Advantages of term life insurance

• Term life insurance is inexpensive and a budget-friendly way to plan for the worst-case scenario.
• Age and health are a big factor in your monthly premiums. You’ll find more attractive pricing if you’re in your 20s or 30s vs. someone in their 40s.
• You can tailor your coverage to meet specific needs, situations or budgets.

Considerations of term life insurance

• The payout can lose buying power over time, as your salary increases (along with the cost of living). For longer term policies of 20 to 30 years, be sure to revisit your needs periodically.
• Once the term comes to an end and there was no payout, that’s it. There’s no way to recover what you put into the premiums.

Read: Insurance for grownups: Why an independent agent is the upgrade you didn't know you needed

The 101 on whole life insurance

Sometimes called traditional life insurance, whole life insurance lasts the life of the beneficiary. Because you could potentially be paying into it for decades, it includes features to bolster the value.

There’s a cash component that sets aside a portion of your premiums. You can use this feature to increase the value of your death benefit, or you can access the cash for your needs as a “living benefit.”

• The cash value earns interest, which can be reinvested into the cash value to purchase additional death benefits — increasing the payout upon death.
• Whole life polices can earn dividends based on the financial performance of the company.
• You can borrow and pay interest on the cash value. Unpaid loans will lower the payout.
• You also have the option of cashing out the equivalent of the premiums you paid.

Advantages of whole life insurance

• You can grow the value and payout of the death benefit over time.
• Premium payments are locked in, unchanging for the life of the loan.
• Death benefits are guaranteed.
• You can protect your asset by taking out a voluntary rider in the event you become disabled or critically ill and unable to continue payments.
• You can name your heirs as beneficiaries and the money goes right to them.

Read: Choosing the right financial caregiver

Considerations for whole life insurance

• Monthly premiums cost significantly more, often 10 times more than term life insurance.

Term life insurance vs. whole life insurance: Which is best for you?

If you’re looking for ways to protect your new family, term life is hands down the most budget-friendly option. But if your budget can handle the monthly premiums (without causing a strain), whole life insurance can be an effective wealth-building tool to leave something to your heirs.

Optimal protection for your family in your hometown

Set up a meeting with one of our helpful agents on the insurance team at Minnwest Insurance Agency. We’re located in hometowns throughout Minnesota and southeastern South Dakota. As independent agents, we can compare rates from numerous insurance companies, so you can get the best coverage at the best value for yourself and your whole family.

Personal insurance products from Minnwest:

• Auto and Recreational Vehicle Insurance
• Homeowner’s Insurance
• Flood Insurance
• Personal Liability Insurance
• Life Insurance
• Health Insurance
• Umbrella Insurance
• Aviation Insurance
• Renter's Insurance
• Watercraft Insurance

Call or meet with an independent insurance agent at Minnwest Bank today!

Minnwest Insurance Agency, Inc is an affiliate of Minnwest Bank. Products offered through Minnwest Insurance Agency, Inc are: Not a deposit | Not FDIC insured | Not insured by any federal government agency | Not guaranteed by the bank or an affiliate of the bank | May go down in value (if applicable)