What is better and why? Whole vs Term life insurance comparison

Nearly everyone purchasing life insurance is a little unclear about what exactly are the differences between Whole Life and Term insurance. Whilst life insurance will always provide the people that you have designated as your beneficiaries with the necessary funds in the unfortunate event that the main household provider passes away, Whole and Term life insurance are most definitely very different things. The question of ‘what is better and why’? I will leave up to you because every persons situation is different, what I can do is give you the pros and cons for both to help you make a more informed decision. Always do what is best for you and not what others tell you, this is very important when purchasing life insurance.

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The issue of Whole vs Term came up recently when I was chatting to a friend that was looking into purchasing Australian life insurance. Here are the pros and cons that I told him about:

Whole Life Insurance

This does exactly what it says on the tin, Whole Life insurance will cover you for your the whole of your life. Unlike Term Insurance there is no expiry date put on Whole Life insurance. For this reason is it is the more expensive option.

The Pros

Cover for your  lifetime at a set amount

– Many of the policies actually build cash values and can be used during your lifetime

– It beats Term insurance hands down in any of these events; Estate planning, continuing income later in life and maximising pensions.

The Cons

– The prices are high. Due to the fact that Whole Life Policies are there to last you the entirety of your lifetime the premiums you have to pay are much more expensive that Term Life insurance.

– There will be no flexibility. As life goes on your coverage needs will need tweaking and changing due to anything from age to your dependents financial status, but a Whole Life policy can not be altered or amended. The amount of cover that you choose to buy at the beginning of the policy will the amount you have until you finish.

Term Life Insurance

The Pros

– The prices are low. If your health is in good order and you are in your 30s or 40s you will be able to get hundreds of thousands worth of coverage for only a couple of dollars a day, sometimes even less.

– The Premiums are fixed. Your premium will be guaranteed for the whole life of your policy, this will often be anywhere between 10 to 30 years.

– It’s flexible. As you life changes so do you needs for coverage, this then changes the type of policy that you require. If one day you realise that you probably don’t have enough life insurance, which is usually the case after you make a large purchase such as a house, you can simply increase your level of coverage.

The Cons

– Extensions are pricey. When your fixed time period for the policy is coming to a close you might want to extend it, but the bad news is that it will be better to apply for another new policy. It will work out much to expensive to extend.

Conversion options are limited. If you want to convert your Term Life insurance policy into a Whole Life policy and you leave it too long you may not be able to do it. Usually the conversion options expire about halfway into the policy.