Term vs. cash value life insurance: what do you need?

Each life insurance product is designed with a particular need in mind. So deciding whether you should get term life insurance or cash value life insurance (or a mixture of both) is dependent on your specific need at a particular time in your life.

What do you need?

Depending on your need and age, your need for term life insurance or cash value insurance will vary. To illustrate:

Here are those common needs further explained:

Income replacement. Life insurance steps in to replace lost income due to the death of a parent, whether a breadwinner or a housewife who takes care of the family. This ensures that the family has the income that they need to meet their daily needs.
Estate planning. If you have a particularly large estate, your heirs may be charged with high inheritance taxes. The proceeds from life insurance (which is tax-free) may be used to cover the taxes.
End-of-life expenses. This includes funeral and burial expenses, as well as any possible hospital bills.
Assurance that a child/parent has the necessary assets. For parents of a child who is disabled and who will not be able to support himself, life insurance can provide assets that will take care of the child or aged parents in the event of their loved one’s death.
Mortgage cover. Getting a mortgage entails a long-term risk. When the family’s breadwinner dies and the family loses the income, the mortgage may also be at risk. Life insurance will cover the mortgage, ensuring that it will be paid off in the event of the insured’s death.
Child’s education. There are cash value plans that provide life insurance (in case you die before your child goes to college and some of the proceeds can be saved up to cover the tuition). The cash value, which can be designed to coincide with the projected tuition fees your child will have after a specified number of years, can be used as “savings” for the tuition. At the end of the term, you get the cash value and the cover terminates.
Retirement. The same concept as the one above, but this time, there is a longer period for the cash value to accrue (especially if the plan is taken at an early age).

When considering whether to get term or cash value life insurance, it will be helpful to remember that each of these products has their own set of advantages and disadvantages.

Term life insurance covers a person within a certain time period. After that period has passed, the coverage ceases. There are no cash value accumulations so the insured will not get a refund of the premiums he already paid, unless he gets a cash back policy.

In contrast, cash value life insurance (also called permanent life insurance) provides both life insurance coverage, as well as a “savings” component. At the end of the policy, depending on the way the policy is set up, the insured usually receives a certain benefit amount. This means that when a person dies within the policy term, he is assured that the insurance will kick in to meet his family’s financial needs. If he survives the policy term, he stands to get a certain amount, which he can use to fund a specific purpose – his child’s education or his retirement.

You ask yourself, “Do I go for the currently more affordable term life insurance or will the whole life policy be a better deal in the long run?” It’s like asking, “Will it be worth to rent or buy a house?”. The answer lies on your financial and family situation.

To help you decide, here is a table outlining their differences:

	Term Life Insurance	Life Insurance with Cash Value in the UK
Period of Coverage	The life insurance cover will end once the coverage period ends. You may opt to extend the policy to another period, but premiums will change to reflect your age and health condition at the time the policy is extended or renewed.	Usually, the life insurance cover will end once the coverage period ends. In some cases, the insured or his beneficiaries stand to receive a benefit amount when the policy expires.
Premiums	The premiums will pay for insurance coverage for that specific period. For instance, if the term life policy is good for 5 years, the payment will be set to cover the 5 years in which the policy is in force.	This policy accumulates cash value. As such, premiums paid not only cover for the insurance component but the “savings” component as well. Thus, this policy is more expensive to acquire and maintain.
Need Best Answered	This product is best for those who want to cover a temporary need such as: A debt (i.e. a mortgage or credit card debt) The need to provide for your family in case of your death (while the kids are young and need a breadwinner) The need to finance education costs that your family can’t afford if you passed away Term life insurance is ideal since you won’t need coverage when the debt has been fully paid, when the kids are already grown up and independent or when they have already finished with college.	This product is best for those who want the combination of life coverage and “forced” savings. The cash value aspect of the policy will ensure that you have a lump sum at the end of the policy period for needs like: Your retirement Your young child’s educational costs 15 or 20 years down the line A major project you want to save up for (such as money for the purchase or down payment of a house) To pay estate taxes, if the assets you will have your beneficiaries inherit are larger than the exemptions
What you can do to make the most of your policy	Premium cashback option. If you’re worried about losing the premiums in the happy event that you survive the term, this will refund premiums paid. Read more about riders and how you can strengthen your term life policy To cover a loan, get a decreasing cover, which is designed to coincide with how your loans payable will decrease over time. This means premiums savings. Policy conversion option. You can consider getting a convertible option so that after a certain number of years, when you are more able to afford the premiums, you can convert to a cash value life insurance policy.	If you’re strapped for money and are tempted to give up your life insurance because you can’t afford the premiums, you can either apply for a loan from your cash value or opt to use the cash value to pay for premiums: Fully paid up but the cover is decreased, so that you don’t need to pay for the policy anymore Regular withdrawals from the cash value to pay for the premiums as they become due
Pros	The cheaper option at the onset. You can use the extra money you “save” by getting term life instead of whole life and invest it for higher returns than what is provided by a whole life policy. You can buy term and invest the “premium savings” yourself, presumably for a higher rate of return as compared to that offered by a whole life policy. Premium savings, especially if you opt for a decreasing policy. Simplicity of the product. Term life insurance is pretty straightforward – you pay for the premium and then you are covered for the specified insurance amount. This is in contrast with cash value life insurance plans where the dividends may vary based on the performance of the investment. Flexibility. When you have a policy that is renewable and convertible, you have the option to extend the coverage for another term without the need to submit to a medical exam. You can enjoy continued coverage, but this may cost more as your grow older.	Cash value accumulates over time. The cash value can be used to fund the premiums when it is large enough. Can function as “forced savings”, since you don’t have easy access to the cash value. This can be later used to fund one’s retirement. Earnings on cash value are tax-deferred. Continued coverage. A permanent life insurance will assure you of coverage by the time you reach a considerable age, even when your health declines.
Cons	One may not have the discipline to invest the “premium savings” If you don’t make a claim while the term insurance is in force, you start all over again, but with a higher premium rate There is a risk that you become uninsurable (i.e. an accident renders you totally disabled or you get diagnosed with a critical illness)	The rate of return offered by the cash value is lower as compared to other investment vehicles. Premiums are more expensive at the onset. Cash value needs time to accumulate so you can’t expect a significant amount 5 to 10 years into the policy.

Updated on: 03.06.2013

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