Comparing Costs: Term Versus Whole Life Insurance

If you are a longtime business owner, you are likely worried about how to safeguard the company you've worked so hard to establish. How do you make sure the business continues to thrive when you retire or is protected financially should it fall into hard times? A unique solution you may not have considered is an indexed universal life insurance policy (IUL), a type of permanent life insurance that's linked to a stock market index.

If something happens to you, the insurance provides money that can help keep your business running or support your family. The policy can also grow cash over time, which you can use for loans or reinvest in your business.

Despite these advantages, indexed universal life insurance isn't right for everyone. Before deciding if an indexed universal life insurance policy is right for you, consider your individual circumstances and compare the advantages and disadvantages to other life insurance options.

Term vs whole life insurance: Which is better?

Understanding the difference between term and whole life insurance—two main types of life insurance—helps you make a smart choice about your coverage. One is not necessarily better than the other, but which type of coverage is best depends on your needs.

Term life insurance usually lasts for a set period, normally 10 to 30 years, and does not build cash value. This means the policy isn't designed for cash accumulation; it is simply a way to protect your loved ones in case of an untimely death.

If you only need help during your working years, term life insurance is a suitable option. For example, if your goal is to help pay off your mortgage or fund your children’s college education in case of your death, this type of protection is ideal.

Unlike term insurance, which covers you for a set period, whole life insurance lasts your whole life. It costs more upfront, but part of that higher premium builds cash value that helps offset the rising cost of insurance as you age. Some whole life policies let you pay for a limited time, while others require payments for life. The insurance company invests the extra premium to help fund the policy.

Whole life insurance is an ideal option for those seeking a policy that not only provides a death benefit in the event of an unexpected passing but also builds cash value for financial needs during one's lifetime.

How does term life insurance work?

Term life insurance covers you for a set period. If you pass away during that time, your beneficiary gets the payout. If you outlive the term, the policy ends with no payout. These policies don’t build cash value, and while longer terms cost more upfront, they lock in your premium for the full period. In certain circumstances, you may convert your term life insurance into a whole life insurance policy, but you’ll need to work with an insurance agent to determine if, and how, this can be done.

There are several types of term life insurance available, including level term and decreasing term. Level term life insurance is what most people think of when they think about term life insurance. It offers a death benefit that stays the same throughout the policy period, so your beneficiaries will always know exactly how much to expect if they need to file a claim. Decreasing term life insurance reduces the potential death benefits over the life of the policy, usually in one-year increments, which means the longer you have your policy, the less your beneficiaries will receive if they need to file a claim.

How does whole life insurance work?

Whole life insurance provides coverage for your entire life and includes a guaranteed death benefit, plus a cash value component that can grow over time. Part of your premium goes toward building this cash value, which you can borrow against or withdraw in certain cases.

There are several types of whole life insurance, each offering slightly different benefits, and various balances of risk, return, and flexibility.

Children's whole life insurance is a unique type designed for children aged 14 days to 17 years. One of the best things about it is that you can lock in a low premium and guaranteed coverage for a lifetime. Children's whole life insurance also accumulates cash value as your child grows up.

How costs differ between term and whole life

Cost is an important consideration when choosing which type of life insurance to buy. Term life insurance is usually less expensive than whole life insurance because it offers coverage for a set period. You’re paying purely for the death benefit, with no cash value accumulation, which keeps costs low.

Whole life insurance, on the other hand, provides lifelong coverage and includes a savings component that grows over time, making the premiums higher. For other people, especially younger individuals or those on a strict budget, term life offers a more affordable way to get the coverage they need.

You can use the Mutual of Omaha Life Insurance Calculator to find out exactly how much you’ll pay for life insurance coverage.

Term vs whole life insurance: pros and cons

Trying to decide between term and whole life insurance? Consider the pros and cons for each. With term life insurance, the pros include:

• Affordable coverage protects your loved ones financially should you die.
• Because the risk of paying out on a life insurance policy is lower for younger individuals, premiums are less expensive than whole life insurance.
• People concerned about covering mortgages or children’s education after death may find this a better option.

Some cons of term life are:

• Since it has no cash value, your paid premiums disappear if you survive the policy.
• Premiums may increase upon renewal as you age.
• Some policies require a medical examination at renewal to qualify for the lowest rates.

Whole life insurance has many pros, including:

• Lifelong coverage and the added benefit of building cash value over time.
• Your premiums generally stay the same, and your beneficiaries are guaranteed a payout as long as the policy is active.
• The cash value component means you’ll be able to borrow against it if necessary, providing a type of emergency fund for your family.¹

Some cons of whole life insurance include:

• It is usually more expensive than term life.
• The returns on the cash value portion may be lower than what you could earn by investing on your own.

Choosing the right coverage for you

There are some general guidelines for choosing between term and whole life insurance, but the decision should depend on your financial goals, budget, and the level of coverage you need.² If you’re looking for affordable protection for a specific period, like while your kids are living at home or you still owe money on your mortgage, term life insurance may be the best choice for you. But if you want lifelong coverage that builds cash value over time, and you’re comfortable paying higher premiums, whole life insurance might be the right choice for your needs.

Regardless, it is important to consider the financial strength of the insurance company you select and their history of paying claims. Mutual of Omaha has a long history of helping people protect what matters most; their lives, families and futures.

Whether you decide on term or whole life insurance, connect with a Mutual of Omaha financial professional to make sure you have the right coverage for your needs.