Why Term Life Insurance Premiums are Lower than Whole Life Plans?

Life insurance could be complicated and choosing between whole life insurance and term life insurance becomes even more complicated. Life insurance is a must-have for everybody given that you may have many responsibilities to take care of if something unthinkable happens to you.

For instance, you may want to pay off your kids’ college expenses, mortgage, and outstanding debt if you don’t want your family to deal with all these burdens.

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With life insurance, you can secure the financial security of your family and have a guarantee that they will be financially stable even after you pass away.

So, many people ask why term life insurance premiums are lower than whole life plans and if you’re one of them, let’s find out.

Rules & Amount of Coverage

Whole life insurance doesn’t have an expiration date meaning that they last for a lifetime and cannot be canceled (by the insurer) as a result of illnesses or health as long as you pay the required premium payments on time.

Term life insurance, on the other hand, covers a person for a specific period of time which is usually renewable after that term expires. For instance, the average term comes in an increment of five, that is, 5, 10, 15, 20, 25, or 30 years.

death benefits are tax freeIn case of a sudden death within the term length, your beneficiaries will be paid income tax-free death benefit that equals the policy amount you purchased. When the term length expires, your coverage ends there or you can extend the term further in which case the premium price will be higher given that you’re likely to be less healthy and older.

That being the case, term insurance premium is cheaper than the whole insurance premium.

Whole Life Insurance Accumulate Cash Value

Cash value in life insurance has a death benefit and also accumulates value in different accounts within your policy. This means that every time you make premium payments, part of the money is deposited into the cost of insurance, fees and overhead, and cash value.

Whole life insurance comes with a cash value component which accumulates over time. As you pay the premiums, a small amount goes to the policy cash value which is regarded as a savings component. It allows you to maintain insurance for your lifetime, making these premiums more expensive.

In case of an emergency, borrowing against the available cash value is possible as long as you pay the premiums in time.

On the other hand, term life insurance policy lacks cash values; the premiums are for the life insurance death benefits and only provide the money to your dependents upon your sudden death, which makes it less expensive.

Term Insurance is More Flexibility

When planning to purchase a life insurance, it goes without saying that flexibility is the first thing you could be looking for.

With whole life insurance, the cash value accumulates over time and you are given different options on how to use this cash. However, you will pay more for this life insurance because a certain amount is regarded as your life savings.

On the other hand, term life insurance is more flexible which explains why many people prefer it. That being the case, it offers the flexibility to buy the coverage you need.

For instance, if you are only interested about life insurance while your children are young or perhaps to pay a mortgage, you only need coverage of 20 years instead of paying for unnecessary longer premiums, and this makes it cheaper and the most perfect life policy to purchase.

Health Exam – Mandatory or Not?

medical exam in life insuranceWhen doing the application for life insurance, the insurer usually asks a couple of questions to know more about your lifestyle and health. Depending on your response to the questions asked, the insurer will determine whether or not you need a medical examination.

However, in whole life insurance, the insurer will cover you for life meaning that they will need to thoroughly examine your health and in that case, you’ll need a health exam.

In some cases, you can purchase whole life insurance without undergoing a medical exam but you’ll pay higher premiums and the death benefits will be low.

With term life insurance, you can buy no medical exam life insurance with higher premiums. But, if you take medical tests, it will significantly lower the premium rate as you are buying a plan for a fixed time frame. Currency inflation rate is lower in term insurance.

Management is Easier in Term Insurance

With a whole life insurance, the insurer has a lot to manage for you than in term life insurance.

For instance, after paying your premiums for whole life insurance, part of the premiums automatically goes towards your death benefits while the rest is deposited into your investment account.

An investment account is an account that insurer invests on your behalf in terms of dividends. Both the dividends and investments make up the cash value which grows annually and you can make withdrawals on certain policies.

On the other hand, term life insurance is simply a temporary life insurance solution which will cover you over a specified period of time with minimal management from the insurer apart from providing the money to your dependent(s) in case you die prematurely.

In addition, the insurer assumes that at the end of the policy term, you’ll be alive meaning that you will not have to pay up.

Therefore, the insurer charges you less and saves money which makes it less expensive than whole time insurance.

Final Thoughts

Life is full of uncertainties and you never know what might happen to you in the next minute. Given that everyone wishes their loved ones to have a good life, life insurance becomes important.

Choosing the right life insurance has never been a walk in the park because many people are confused on which one to purchase and get the benefits they require.

Whole time insurance offers lifetime coverage as well as a cash value component which makes it convenient among many people. However, term life insurance comes with ample coverage and it’s affordable making it the better option for anyone sensitive about the budget.