Life insurance is designed to provide financial support to your loved ones after you die. There are several types of policies, but two of the most common are whole life and term life insurance. Read on to learn about the differences and how to choose the right policy for you.
WHAT IS WHOLE LIFE INSURANCE?
Whole life insurance is a type of permanent life insurance, meaning the person is covered for the duration of their life as long as they pay monthly premiums on time. The policy would pay a death benefit to beneficiaries when the covered person passes away.
In addition to the death benefit, this type of policy includes a savings portion, or “cash value,” where interest may accumulate on a tax-deferred basis. The cash value can be used to purchase extra coverage, make payments greater than the scheduled premium, or reinvest and earn more interest over time.
Eventually, the return grows larger than the total amount of premiums paid into the policy. And, the policyholder can access the cash value while they are still alive (tax-free up to the value of total premiums paid).
WHAT IS TERM LIFE INSURANCE?
Term is a type of life insurance that guarantees payment of a death benefit if the policyholder dies during a specified term, typically 10 to 30 years. If you pass away during the policy term, the insurer pays the policy’s face value to your beneficiaries. This cash benefit (typically not taxable) can then be used in a variety of ways.
If you outlive the policy term, there is no payout and premiums will be recalculated based on your current age/health. Once the term expires, the policyholder can either renew it, convert to permanent coverage, or allow the policy to lapse.
WHOLE VS. TERM LIFE INSURANCE
|
Whole Life Insurance |
Term Life Insurance |
|
|
Length of Coverage |
Coverage lasts entire life. |
Choose length, typically 1, 5, 10, 15, 20, 25, or 30 years. |
|
Cash Value |
Yes—grows at guaranteed rate set by insurer. |
No. |
|
Death Benefit |
Pays out when policyholder passes away; typically level but graded death benefit policies are available. |
Only pays out if policyholder passes away within the term; typically level, but decreasing death benefits are available. |
|
Cost |
5 – 15x more than term; based on age, health, gender, type of policy. |
Least expensive policy; based on age, gender, health, policy value, and other factors. |
|
Premium |
Typically stay level throughout length of policy. |
Typically stay level throughout length of policy. |
DO I NEED WHOLE OR TERM LIFE INSURANCE?
Choose term life if you:
- Only want coverage for a specific period of time.
- Want the most affordable coverage.
- Don’t want to use life insurance to accumulate a cash value.
Choose whole life if you:
- Want coverage for your lifetime.
- Can afford the higher premiums.
- Want life insurance that builds guaranteed cash value.
Work with a life insurance agent to learn more and decide which type of policy is best for you.
