TERM VS WHOLE LIFE INSURANCE
If someone relies on your paycheck, you should know you need to have life insurance. And when you boil things down, you really only have two options. Term and whole life insurance are the two most commonly purchased types of life insurance policies. Life insurance shoppers often struggle with a big choice at the start of their decision-making process: Term or Whole Life? While most people know that life insurance will pay a sum of money to their beneficiaries if they pass away, they may not be able to explain the differences and benefits of term life insurance vs whole life insurance.
So what are the differences?
Which should you buy?
Let‘s get right in.
WHAT IS TERM LIFE INSURANCE?
Term life insurance covers you for a specific amount of time and is intended to provide death benefits in the event of premature death. It typically provides coverage between 10 and 30 years. While you must keep up with monthly premium payments, it only retains value if you pass away during the term. If you get a term policy to protect your family, you should think about whether your family’s need for life insurance will change before the time the term expires.
WHAT IS WHOLE LIFE INSURANCE?
Whole life insurance is exactly what it sounds like. It is a type of coverage that lasts your whole life. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component. A policy has cash value when a portion of your premium dollars are invested and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains. So it's safe to say a whole life insurance policy tries to double up as an investment account.
Because whole life insurance is designed to build cash value, it costs more. A part of each premium you pay contributes toward growing the policy’s cash value. You can tap into your cash value to take out a loan, pay your premiums, or surrender the policy for its cash value amount.
WHAT IS THE DIFFERENCE BETWEEN TERM AND WHOLE LIFE INSURANCE?
The most common forms of both term life and whole life have level premiums. That means your premium payments won’t change over time and you’ll know exactly how much you owe. Life insurance companies generally offer payment plan choices such as monthly, quarterly, semi-annually, and annually. If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single-premium whole life insurance, or policies with payments for a certain number of years, such as 10 years. This allows you to have more budget flexibility later in life.
The best term life insurance companies offer flexible benefits, such as the ability to convert a term life policy to permanent life, at a good price.
Whole life and term life policies have guaranteed payouts, called death benefits. A death benefit is generally paid tax-free to your beneficiaries.
Here comes the difference. If you outlive a term life policy, you don't get a payout. After the period of level premiums ends you can usually renew a term life policy at a higher cost. But if you don’t renew, the policy terminates and coverage ends.
But with a whole life insurance policy, you get a payout whether or not you pass away, as long as you’ve paid the premiums.
3. Cash Value
While both pay a death benefit to your beneficiaries, whole life also provides lifelong coverage with a cash value component while Term life insurance builds no cash value.
Price differentials between term and whole life will vary based on age, coverage amounts, and companies. But generally, premiums for whole life insurance are usually higher because of the lifelong coverage and cash value they offer.
5. Ending a Policy
With term life insurance, you can stop paying and terminate the policy. Since there’s no cash value, there’s no money to walk away with.
To end a whole life insurance policy, you can also simply stop paying. The life insurer will likely use any cash value to continue paying the premiums on your behalf until the cash value is depleted. Instead of walking away, you can reach out to the insurer and take what is left of your cash after deducting any surrender charge.
WHICH SHOULD I CHOOSE?
Choose term life if you:
• Want life insurance to cover a specific financial concern that has an endpoint such as the years you’re raising children or paying off your mortgage.
•Want the most affordable coverage.
• Think you can invest your money in a better financial product. Buying a cheaper term life policy lets you invest what you would have paid for a whole life policy.
• Your life insurance need has a definite end, such as the years until you retire.
Choose whole life if you:
•Are looking for a policy that will earn money. A couple of modern variations of the whole life policy can enable you to make more money.
•Want to provide money for your heirs to pay inheritance or estate taxes.
• Have a lifelong dependent, such as a child with disabilities.
•Want to spend retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.
• Plan to leave a business or property to one child. Whole life insurance could compensate other children.
After all, is said and done, which type of policy should I buy?
There are a lot of things to consider in addition to the type of policy you get. You can find a financial professional who will take the time to learn about your unique situation, and explain the different insurance options that best fit your needs and your budget.
Yes, you can’t see the future and aren’t promised tomorrow. But, the cost of not having a plan in place for the unthinkable is much higher than the cost of insurance. Don’t let another day go by without being protected. Get insured with Black Insure.