As a millennial, you are probably in the midst of facing a steep learning curve when it comes to things I like to file under “Adulting.” Life insurance is next level adulting because it involves accepting that we aren’t as invincible as we thought we were back in our teens and early 20’s, i.e. we’re not immortal. And as you begin to consider life insurance, there is a lot to understand– the biggest question being what is term vs. whole life insurance?
Beyond the type of policy you go with, you will also need to think about what you actually want out of life insurance. Are you trying to cover the bills if you die prematurely? Or, are you trying to build some wealth to pass down to your family?
Side note: I know this is a super depressing topic to think about, but it’s an important one. Part of adulting is thinking about heavy stuff like this. I know we all wish we could be 10 years old again and run around outside chasing each other with sticks or whatever, but we’re not. Being an adult isn’t all that awful either, but it does mean you occasionally have to think about BIG topics.
Deciding between term vs. whole life insurance doesn’t have to stress you out– my goal with this article is to help you weigh the pros and cons of both term and whole insurance so you can make a decision that benefits both you and your family.
Do I really need life insurance?
Before I get into the details of term vs. whole life insurance, let’s talk for a second about why you might be considering either. As you do more adulting… marriage, kids, etc… there are going to be people who depend on your income, especially if you are the primary or sole earner. If that’s you, think about all of the things that your income currently covers, like rent/mortgage, insurance, bills, debt payments, savings, investments, etc.
If you die suddenly in a car accident, how is your family going to pay the bills?
Losing a loved one is devastating, no matter when it happens, but beyond the loss itself, death can bring a lot of financial insecurity. So another way to think about that question is “would your loved ones be financially worse off if you died tomorrow?”
If your answer is yes, then you might want to consider life insurance.
Another consideration for your family is your student loan debt (this doesn’t apply if you are single without children). Federal student loans die with the borrower, whereas some private student loans may still require a payment upon the death of the lender. Reason #387 for why I hate student loans.
In addition to paying the bills your income covers, life insurance may help your family deal with private student loan debt if that applies to your lender.
Term vs. whole life insurance
If you’re now thinking that life insurance might be a good option for you, the next step is figuring out whether you should buy term vs. whole life insurance. Both types provide death benefits, but that’s about where the similarities end.
Term life insurance explained
Term life insurance is sometimes referred to as “pure” life insurance because, unlike whole life insurance, a term life insurance policy has no other value.
It’s named “term” insurance because you buy a policy that covers you for a set number of years, like 10, 20, 30, etc. The term you decide upon should coincide with the number of years that you will be responsible for covering a significant number of expenses. You are only paid if you die within that term, which can be extended (but it will get more expensive).
The payout, or death benefit, is ideally what your family uses to cover your burial costs, the bills that your income covers, and what you would contribute to savings and investments. You can get an idea of what that will look like with a life insurance calculator like this one.
Your bills should reduce as you age, with things like a mortgage and student loan debt being paid off, plus if you have children, your expenses will decrease once they leave home. Most families choose a term life policy that covers their dependents until those major bills are paid off, and some families chose to add the cost of college into the policy.
In addition to a reduced monthly cost of living, as you age, you will be watching your investment accounts and your savings grow. It’s unlikely for most families, however, that those financial vehicles will have matured to the point that your family could live off of them in the event of your premature death.
With term vs. whole life insurance, your term life insurance policy will essentially cover the gap between establishing your family finances and seeing them fully mature.
Cost of term life insurance
Term life insurance is arguably the least expensive life insurance option, and that’s because of what it offers (no cash value, death benefit only if you die within the term, etc.) The premiums will be relatively low and will likely stay the same within the term you choose.
Once you get to around age 50, the premiums will increase, but that’s because you are more likely to die within that term.
Let’s all take a minute to get comfortable with the fact that we are talking about the imminent death of ourselves or a loved one. It’s the circle of life… you know, baby lions lifted up to the sun and all of that.
Your premiums, and then death benefit, are determined by your age, income, number and age of dependents, outstanding debt, and savings.
You can roll term life insurance over to a whole life policy, but it will get more expensive. Also, if you stop paying, your policy can expire.
For quotes or more information about term life insurance, read my Haven Life Insurance Review.
Whole life insurance explained
When deciding between term vs. whole life insurance, you need to understand that whole life insurance is a significantly more complex financial vehicle all together. Also, you may have heard it referred to as “permanent” life insurance. Why? Because it offers lifelong coverage.
Beyond guaranteed coverage for the rest of your life, whole life insurance has several other components that aren’t offered by term life insurance, such as:
- An investment component (possible dividends to reinvest in the policy)
- Cash value
- The option to withdraw or borrow a portion of its value
Your premium is split between your death benefit and the cash value. As time passes and you get closer to death, the death benefit shrinks and the cash value increases. As the return on the initial investment grows (premiums), the cash value increases at a guaranteed rate.
The cash value is something you can borrow against (as in payback with interest), or in certain types of whole life insurance (variable for example) the cash value acts like a mutual fund. The cash value aspect is going to entirely depend on the type of policy you choose.
Whole life insurance might be better for situations like:
- If you have a child or other dependent who will need lifelong care. Whole life insurance can be used to create a trust, with an attorney, to provide lifelong coverage for them.
- You are a VERY wealthy individual who wants to offset or cover estate taxes.
- You want to spend all of your savings in retirement and still leave a substantial inheritance for your dependents.
Some think of whole life insurance as more of an estate planning tool.
The cost of whole life insurance
A whole life insurance policy is going to be significantly more expensive than term life insurance, generally around 6-10 times more expensive. You probably already understand why, considering what whole life insurance offers– guaranteed coverage, a cash value, etc.
Despite the high cost of whole life insurance, it also provides the security of knowing that your premiums will stay the same for as long as you live.
Read more at Life Insurance Explained
Which one should I choose, term vs. whole life insurance?
Life insurance shouldn’t be taken lightly because there are too many variables at play, which are defined by the very personal specifics of your unique financial situation. At the beginning of this article I mentioned thinking about what you want out of term vs. whole life insurance in the first place, keep that in mind as you proceed.
But if you really want my opinion, whole life insurance is wrong for most people for a lot of reasons, namely the cost.
The average 30-year-old, who is a non-smoker and wants $250,000 worth of coverage will pay around $30 per month for a term life insurance policy. You can see term life averages here. But for a whole life insurance policy, that could reach as high as around $300 a month.
If you’re thinking that the cost difference would be worth it for the type of coverage a whole life policy would offer, remember that there are TONS of other investment options out there, and whether you realize it or not, life insurance is an investment vehicle. Most other options will offer you a much larger return than life insurance.
For the average millennial thinking about term vs. whole life insurance, term life insurance is likely going to be a much better option. It’s relatively inexpensive and can cover your family when they need it the most, etc.
But, do I think every millennial needs it? No, not at all.
If you have a decent amount of money set aside, lower expenses already (paid off your debt and mortgage), no spouse or they are also employed, and/or no children, then you might consider forgoing life insurance altogether.
When it comes to term vs. whole life insurance, I actually know a lot of people who think both options are a huge waste of money, even term life insurance, because it doesn’t actually guarantee you anything in the end, just the possibility of coverage.
There is nothing wrong with that viewpoint, but you need to think about where your finances are and how you (and more importantly your family) would actually deal with such a major loss.
If you decide to seriously consider buying either type of insurance, do your research and speak to a trusted insurance broker. Make sure they are independent and are able to shop around with the best life insurance companies for your family.
I personally have a term life policy through Haven Life Insurance, and you can get a quick (free) quote for yourself here.