Whole life insurance is similar to term life insurance, in both types of policies offer a payout upon the death of the insured. However, there are important differences. While whole life insurance offers a guaranteed death benefit for the entire lifetime of the insured, a term policy only pays out if the insured dies within a certain time frame—usually 5, 10, or 20 years.
There are other considerations as well. In order to provide greater benefits, a whole life policy requires significantly higher premiums than a term policy with the same coverage limit.
The main advantage of whole life insurance is that it provides lifelong coverage that never expires or needs to be renewed. While term insurance does not pay off if the insured does not die within the predetermined time period, a whole life policy offers lifelong protection with a fixed premium. It also accumulates cash value, that can be spent on expenses like medical care or retirement.
As an estate plan, whole life insurance can provide extra benefits above a traditional inheritance. In many states, the death benefit is protected against claims by the decedent's creditors. Moreover, the cash value of a life insurance policy is tax-deferred, and loans against the policy are also tax advantaged.
The main disadvantage of whole life insurance is that it is expensive. Whole life premiums are significantly higher than those for a term policy, and they have less flexibility than universal life insurance policies. When choosing a life insurance policy, it is important to consider the potential returns from investing the same money in other vehicles.
Pros
A guaranteed death benefit that lasts for the entire lifetime of the insured
A cash value that the insured can borrow against while they are alive
Upon the death of the insured, the benefits are protected from claims by creditors.
Tax advantages for cash value growth and loans against the policy
Cons
Higher monthly payments than term life insurance
Premiums have less flexibility than other types of life insurance.
Cash value grows more slowly than other types of investments.