Term vs Whole Life Insurance Plans: Which is Better? | MetLife Bangladesh

Definition of Term Life Insurance

Picking the best life insurance product for your coverage depends on a number of factors. Term plans run for a set number of years and are comparatively cheaper than whole life insurance which gives lifetime coverage. Whole life insurance policies also let you build cash value. Both policies include death benefits for loved ones.

Both term and whole life plans have pros and cons and your coverage needs will determine which plan is the best fit for you.

Definition of Term Life Insurance

Term life plans are defined by the number of years they provide coverage. There’s no cash value component and beneficiaries receive a death benefit payout in the event of the insured’s demise.

What is Term Life Insurance Plan?

In return for life coverage, the insured makes periodic payments, also known as premiums to the insurer. Death benefit payouts can be used to cover loans, pay for your child’s education or fund your loved one’s lifestyle should you not be around to support them.

Pros and Cons of Term Life Insurance

Weighing up the pros and cons of term life insurance will help you make a well-informed decision for optimal coverage needs.

Benefits of Term Life Insurance

Premiums Can be Incredibly Low

Compared to whole life insurance, term plans come with exceptionally affordable premiums making them a cheaper option for people on a tight budget. Premiums are calculated based on your age, gender, health and policy face amount.

Premiums Are Fixed for the Length of the Term

Most term life plans offer fixed premiums, however, make sure it’s applicable when you review this type of policy with an insurer.

May Be Convertible or Renewable Depending on Your Policy

Depending on the insurer and the terms and conditions of the policy, you may be able to convert the term plan to a whole life policy. This allows you to continue your coverage while building cash value. Having the option to renew the plan at the end of its tenure saves you the hassle of purchasing a new one.

Disadvantages of Term Insurance

Protection Only Lasts for the Term of the Policy

Death benefit coverage only lasts for the duration of the policy term which means loved ones receive no payout if the insured passes away after the plan ends.

No Cash Value

Conventional term life insurance plans don’t build cash value which means you can’t take a loan against your policy or make a withdrawal from the plan.

It Can’t Be Used as a Wealth-Building or Tax Planning Strategy

Term plans aren’t investment vehicles which means you can’t use them to generate wealth. While you benefit from taxable deductions on premiums paid, this type of insurance policy isn’t useful for tax planning strategies in your financial portfolio.

Definition of Whole Life Insurance

Whole life or permanent insurance provides coverage for as long as you live and cash value which may grow over a number of years.

What is Whole Life Insurance Plan?

A death benefit is guaranteed for your loved ones as long as premiums are paid. A portion of the premium is invested to accumulate cash value while the other half is paid towards the life cover. You may borrow against or withdraw from the plan’s cash value after a number of years.

Pros and Cons of Whole Life Insurance

Understanding the benefits and disadvantages of whole life insurance will determine if this plan is better for you or not.

Benefits of Whole Life Insurance

Build Cash Value You Can Borrow Against or Withdraw

Having the option to borrow against or withdraw from your policy’s cash value gives you peace of mind you can access funds when necessary.

Guaranteed Death Benefit for Heirs when Premiums Are Kept Up to Date

Your beneficiaries are guaranteed a death benefit payout throughout the policyholder’s lifetime as long as the premiums are kept up to date.

Loans and Withdrawals Are Tax-Free With Beneficial Terms

Whole life insurance offers an attractive tax-free benefit on loans and withdrawals against the policy’s cash value. This makes the plan a useful financial vehicle when planning your tax strategy.

You Can Lock In Your Premiums for Life

One of the most attractive benefits of this type of life insurance is that you can fix the premiums for life, making it easier to plan for your financial and coverage needs.

Disadvantages of Whole Life Insurance

Premiums Cost Much More Than Comparable Term Policies

Because you can generate cash value and have lifetime coverage, the premium is more expensive compared to term policies. You can expect to pay up to 10 or 15 times more for this type of insurance policy.

Mediocre Returns for the Amount You Pay In Compared to Other Potential Investments

While a portion of the premium is invested to grow the plan’s cash value, the returns aren’t as high as other potential investment vehicles. This can be a drawback if you want to generate wealth.

If Policy Lapses Within the First Few Years You Could Face Surrender Charges

If you choose to stop paying premiums within the first few years, not only will your policy lapse but you could face surrender charges. Depending on the policy’s terms and conditions, you could end up paying surrender fees for up to 15 years.

Any Outstanding Loans Will Reduce Your Death Benefit

If you don’t repay any outstanding loans against the cash value, the death benefit amount will reduce putting your loved ones at financial risk.

Term vs Whole Life Insurance: Which is Better for You?

When deciding between term vs whole life insurance and which one is better for you, we’ve detailed factors you should consider before making a final decision.

Term Insurance is Best For:

Consumers Who Need to Buy Life Insurance With a Large Death Benefit

Term plans offer affordable life cover with substantial death benefits for beneficiaries allowing your loved ones to maintain the lifestyle they’re accustomed to.  

People Who Need Affordable Premiums

This is one of the most affordable insurance options with low premiums while guaranteeing your loved ones financial protection during difficult times.

Anyone Who Wants Life Insurance Coverage for a Specific Period of Time

This is the ideal life insurance plan if you’re looking for coverage over a specific period of time such as during your working years. It’s also the best plan if you only need life cover for a short time.

People Who Want to Buy Life Insurance Online (Possibly Without a Medical Exam)

Term life insurance plans can be easily purchased online and at times, can even be bought without a medical exam. However, this is dependent on the insurer you deal with.

Whole Life Insurance is Best for:

Anyone Who Wants Life Insurance Coverage for a Specific Period of Time

If you want to protect your family’s financial well-being long-term, whole life insurance is your solution. The policy never expires as long as you pay your premiums, providing a guaranteed death benefit throughout your life.

People Who Want a Policy That Includes an Investment Account for Building Cash Value

If you looking for both life cover and an investment vehicle that allows you to build cash value, this is the plan for you.

High-Net-Worth People Who Don’t Mind Paying Higher Premiums for Permanent Life Coverage

Permanent life insurance coverage comes at a cost but if you’re earning a substantial income and don’t mind paying high premiums, this is the best deal for you.

People Who Can Comfortably Afford Higher Premiums

Whole life insurance isn’t cheap and is best suited for people who can comfortably budget for higher premiums without them impacting their other financial obligations.

Frequently Asked Questions (FAQ)

What happens to term life insurance policy at the end of the term?

When term life insurance reaches the end of its tenure, you don’t have to do anything. However, the insurance company may offer (should you choose to accept) the option of converting it to whole life or renewing it.

How much does term life cost vs whole life insurance?

The cost of both types of life insurance policies is dependent on a number of factors including:

-          Age

-          Health

-          Family medical history

-          Gender

-          Policy’s face amount

-          Length of the policy term

-          Occupation

-          Driving record

Before signing a life insurance contract with a provider, the insurer will require the abovementioned information before calculating the premium rate.

Are whole life and term insurance policies taxable?

According to Bangladeshi Income Tax laws, whole life and term insurance payouts are taxable from a certain level. Your tax advisor will be able to give you more information in this regard.