21 Oct Term vs. Whole Life Insurance: Which Is Best for Veterans?
In the event of death, disability, accident, or retirement, a life insurance policy provides financial protection for veterans. As a result of natural or accidental causes, anyone can be prone to death and disability. And if it happens, the entire household is at risk for loss of income.
That’s why life insurance is so important. But, where should a veteran start when choosing the right kind of veterans life insurance?
In this article, we’ll discuss the difference between term vs whole life insurance and which one is best for veterans.
Ready to dive right in? Here’s our guide on how to get life insurance for veterans.
What Is Term Life Insurance?
Term life insurance, also known as pure life insurance, provides a specified death benefit if the insured person passes while the policy is in force. The policyholder can either renew the policy for another year or convert it to permanent life insurance. If the policy expires, the policyholder can’t make a claim against the policy.
Term life insurance includes the following key features:
- The insured person’s beneficiaries will receive a death benefit if the insured person dies during the policy term.
- A term life insurance policy has no savings component in addition to the death benefit guaranteed.
- An individual’s term life insurance premium is determined by their age, health, and life expectancy.
- Depending on the insurance company, it may be possible to convert term life insurance into whole life insurance.
Benefits of Term Life
Here are several benefits to understand about term life insurance.
Protect Loved Ones
Life insurance companies are particularly interested in securing term life insurance for children and young people. It is often extremely inexpensive, which makes it an appealing choice for parents who wish to protect their children from income loss should they pass away.
People who require temporary insurance coverage may also benefit from a policy such as this. For example, a policyholder may estimate that their surviving spouse won’t need additional financial protection when their policy expires, or they will have built up enough liquid assets to self-insure.
Individuals who desire substantial coverage at a low cost can benefit from term life policies. They are typically significantly lower in cost than comparable whole life insurance policies.
Easy to Understand
Term insurance plans are much easier to understand than other policy types, which combine savings and risk coverage. A veteran may find it difficult to determine how much of his premium goes to risk cover and how much to savings on their behalf.
Drawbacks of Term Life
The duration of term life insurance policies ranges from one to 35 years. As your needs change, you can have flexibility with this coverage, which is the cheapest one available. However, it doesn’t earn cash value..
Term life insurance may seem like a great option due to its lower cost, but veterans should also consider its drawbacks, including:
- The premiums do not produce a return. The policy does not build cash value despite paying premiums for the entire policy existence. Suppose you outlive the term of your insurance policy without buying a return-of-premium rider. In that case, you will not receive a penny of the benefit.
- Coverage is temporary. A new policy will be required when the term ends. Likewise, your coverage will end when your term expires.
- As you age, your insurance premiums increase. People aged 40+ will have the highest rate increases, which may result in reducing their benefit amount.
- It’s also difficult to quality if you have a significant health issue.
Need to find out if you can get life insurance as a veteran? Here’s our guide to VA life insurance eligibility.
What Is Whole Life Insurance?
Permanent life, or whole life insurance, provides the insured with a death benefit for their entire lifetime. The cash value of whole life insurance may also be accumulated on a tax-favored basis, aside from the death benefit. The term “traditional” life insurance may be used for these policies.
Unlike term life insurance, which lasts for a specific period, whole life insurance lasts for the policyholder’s lifetime. If the policyholder pays their premiums, full life insurance pays out to their beneficiary or beneficiaries upon their passing.
Benefits of Whole Life
Whole life insurance does not offer the same benefits as term life insurance. Here’s what you can expect.
Whole life insurance provides permanent death benefits for the life of the insured, as well as a death benefit and the potential for accumulating cash value on a tax-advantaged basis.
Builds Cash Value
The cash value component of whole life insurance may accumulate over time and is one of the key benefits of owning a policy. In whole life insurance, you can borrow up to a limit against the policy’s cash value.
You accrue interest while you are alive on your policy loan balances. If you die unexpectedly, you may be required to pay off any outstanding loan balance left on your whole life policy.
It Forces You to Save Money
You can also take advantage of flexibility with whole life insurance. You can decide how you want to use the cash that has been accumulated over time due to its potential to accrue value. The cash value in your policy might also increase over time if you choose to invest it.
Drawbacks of Whole Life Insurance
With everything, there are both positives and negatives. Here are some of the drawbacks of whole life insurance.
- To obtain more coverage, you need to pay a higher premium. It’s also typically 5-15% more expensive than term life insurance. So, it’s common for policyholders to surrender policies or get less coverage than they really need.
- It is common for many insurance policyholders to cancel their coverage, incurring many unexpected fees.
- A policy surrender could occur if the cash value is used for purposes other than death benefits such as if loans are not repaid, taxation, or surrendering the policy.
- It may be necessary to make large payments for a policy you do not need as you get older.
- Policyholders may surrender policies or purchase less coverage than they require due to higher costing premiums.
Term vs Whole Life Insurance Comparison
It is important to know the pros and cons of both term and whole life insurance before you decide to purchase it. Here are a few points to keep in mind.
|Term Life Insurance||Whole Life Insurance|
|Younger people pay lower premiums.||The coverage is temporary, based on the selected term.||It builds cash value.||The cost of whole life insurance is higher.|
|Death payouts will be larger for beneficiaries.||After expiration of the term, you must requalify for insurance.||Potential collateral for a loan.||Death benefits for whole life insurance are smaller.|
|Convertible to whole life insurance.||The price of a new term can increase every time you renew it.||Whole life insurance has tax advantages.||The lack of control over investments.|
|Easily adjustable and flexible.||A policy does not accumulate cash value.|
What Veterans Should Consider Before Buying Term Life Insurance vs Whole Life Insurance
Veterans have to make a serious decision about their finances when it comes to life insurance. In addition to protecting your loved ones, it is also a helpful tool long before death.
Here are a few factors you need to consider before deciding between term vs whole life insurance.
Premiums are amounts paid by the insured periodically to maintain coverage by the insurer. Insurance companies determine the premium amount according to many factors, including the type of coverage selected, health conditions, and chosen lifestyle of the policyholder, among others.
After your death, your life insurance payout is sent to the beneficiaries listed on your policy. However, your loved ones aren’t required to receive the money all at once. They can choose to receive payments or place the funds in an interest yielding account. So, veterans should research the payout policies of different insurance providers before buying term or whole life insurance.
The cash value of a life insurance policy earns a modest interest rate, and the accumulated earnings from the policy are tax-deferred. Therefore, the cash value of a life insurance policy will increase with time. Since the accumulated cash value of the life insurance offsets part of the insurer’s liability, the insurer’s risk is reduced as the cash value increases.
Ending a Policy
Upon expiration of your term life insurance, coverage ends, and payment to the insurance company is complete. With a whole life insurance policy, if you outlive your policy, you retain the right to keep the money you put into it.
Cost of Term vs Whole Life Insurance for Veterans
A term life insurance policy is cheaper than a whole life policy because it is temporary and has no cash value. The premiums for whole life insurance are much higher since the coverage lasts a lifetime and the policy builds cash value over time. The following is a comparison of what term life insurance and whole life would cost for a $500,000 policy.
|Insured||20-Year Term||30-Year Term||Whole Life Insurance|
Data Table Source : Nerdwallet
What if You Change Your Mind?
The policyholder has certain rights and responsibilities if they change their mind about their insurance policy. Life insurance plans can usually be canceled or changed at any time. Additionally, in the 30-day period after your plan starts, the company will typically refund any premiums you paid.
Beyond that, any other cancellation will result in the cancellation of your coverage, and you won’t receive a refund. It’s important to understand how your chosen insurance company handles these situations, though.
Tips for Veterans to Change Term Life to Whole Life
Changing from one type of insurance to another, such as from term to whole life insurance, is referred to as converting. A term policy can be converted to whole life insurance if the insured wants longer protection because the term policy expires after a certain period of time.
Changing from term life to a whole life policy will not cost you anything, but your premium amount may increase dramatically.
Ensure that your policy’s “conversion period” is still available by contacting your insurance company. Next, determine how much coverage you need (most companies offer partial conversions, so you may not need to convert your entire policy). Lastly, complete the conversion forms provided by your insurer.
How Veterans Can Change Whole Life to Term Life Insurance
Converting your whole life insurance policy to term life insurance is not an easy process. Generally, companies that offer whole life insurance don’t encourage consumers to decrease their coverage, even if they offer term life insurance options. To make the right decision, it is important to discuss your options with an insurance agent and then to read through your current policy. If you break your current contract, there might be repercussions.
In order to convert your whole life into a term life, you must meet the following conditions:
- You may be able to convert your permanent life insurance policy into a term plan if you have built up cash value. In your contract, this is called an ‘extended-term’ option. It basically takes whatever you’ve built up and pays your life insurance premiums, but only for a short time. This is the easiest solution if you need it long enough.
- However, if your permanent life insurance is not cash-value-funded, it will be difficult to convert your policy to term life insurance while remaining on the same policy. As an alternative, you should consider reducing the death benefit on your current policy, which is typically something you can do at any time. This will lower your premiums and make the process easier than converting from one policy type to another.
Whole Life Insurance vs Term: What’s Right for You?
As you can see, there are many differences between term vs whole life insurance. While term life insurance offers cheaper premiums, whole life insurance offers a cash value and lifetime coverage.
Overall, veterans need to weigh their options and decide which policy makes the most sense for their individual situation. They can also speak with an insurance company that can help guide them to the right choice.