Introduction to Term vs Whole Life Insurance for Kids and Teens
This video does a term vs whole life insurance comparison in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about differences between term life insurance and whole life insurance, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- How are term life insurance and whole life insurance different
- How much would you pay for each
- Do the premiums change over time
- What is the coverage period / can someone outlive their insurance
- Term vs whole life insurance: Other distinguishing features
- Term vs whole life insurance: which one is better
How are term life insurance and whole life insurance different?
Let’s first understand what each of them is as part of the term vs whole life insurance comparison.
Term life insurance is a type of life insurance that gives protection for a certain period of time – called the term. If the policy holder dies during the term of the policy, the beneficiaries receive the death benefit.
Term life insurance is the most affordable type of life insurance.
Whole life insurance is a type of permanent life insurance that lasts for someone’s entire life. In addition to the death benefit, whole life insurance also has a savings component, called cash value, where money grows on a tax-advantaged basis.
The main differences between these two types of life insurance lie in their cost, coverage period, and benefits.
How much would I pay for each, and do the premiums change over time?
Whole life insurance is significantly more expensive than term life insurance. It can cost many times more as it has a cash value, unlike term life insurance.
For both, the premiums don’t change within one policy. This means that the premium for whole life insurance stays the same for someone’s entire life, and the premium for term life insurance also stays the same for a given term.
However, if insurance is needed after the term ends (if the term insurance needs to be renewed), the premium will be higher in the new term life insurance policy.
What is the coverage period, and can someone outlive their insurance?
Whole life insurance lasts for the policy holder’s entire life, and it is impossible to outlive whole life insurance as long as the premiums are paid.
However, it is possible to outlive term life insurance if the policy holder is alive at the end of the term.
Term vs whole life insurance: Other distinguishing features
Are there any other distinguishing features?
Term life insurance offers no frills. Whereas whole life insurance sets aside a part of the premium as the policy’s cash value.
This cash value can be accessed by the policyholder during their lifetime as withdrawals or loans, as needed. However, any withdrawals or unpaid loans reduce the death benefit.
Term vs whole life insurance: Which is better?
So which is better: term life insurance or whole life insurance?
Term life insurance is the purest form of life insurance. It only has the death benefit, and no add-ons – making it the least expensive form of life insurance.
The biggest selling point used to justify the high premiums of whole life insurance is the cash value, but the beneficiaries do not receive the cash value – it goes back to the insurance company when the policyholder dies!
Therefore, the best option for most people is to buy term life insurance for a duration chosen after careful consideration of their dependents’ financial situation.
One popular strategy is “buy term and invest the difference”, where you buy term life insurance instead of whole life insurance, and invest the money saved in premiums. This way, not only will you pay less for the insurance, but you will also be able to invest on your terms to maximize returns.