Both term and whole life insurance are basic forms of life insurance which provide protection in the form of a death benefit for your beneficiaries.
The differences between the types means one may be more appropriate for your situation than another.
The term life versus whole life insurance debate is not new, and for good reason.
Both have their pros and cons which can guide your final decision. They also offer an opportunity to complement your long-term savings.
Let’s take a look at how you can decide which is right for you and your family.
Term Life Versus Whole Life Insurance: The Great Debate
Before we get into the differences, let’s talk about why you should get life insurance in the first place. None of us gets out of here alive. And unless you live in isolation, your demise will impact other people, including, financially.
Think of your spouse and children who depend on the salary you bring home. Sure, it’s about the monthly bills and expenses, but much more, too.
Life insurance means your family won’t suffer the added burden of financial woes should you pass. There may be the unexpected medical costs and burial expenses. Down the line, these may also include more serious obligations such as a mortgage or business debts.
Unfortunately, these costs don’t go away when you die. They go to your family and add to their troubles.
However, not everyone needs life insurance.
If you’re single, for example, it may not be necessary for you to make the investment without dependents. If your family is financially independent, life insurance may not offer any benefits. In some cases, you might find one type more appropriate for you and your family.
Benefits of Life Insurance
Life insurance acts as a safety net to keep your family financially afloat despite the loss of your income. In fact, this is one of the primary reasons people opt to get life insurance.
The death benefit they receive can keep them living in the lifestyle to which they are accustomed. It’s not just about the money. It’s also giving them peace of mind and easing their transition.
You may also consider a life insurance policy to ensure funding for your children’s future. These monies can cover education or other expenses.
Likewise, you may see life insurance as a way to settle matters with your business. You may also have a favorite charity you want to honor with a gift. A life insurance policy gives you this opportunity.
What Is Term Life Insurance?
Term life insurance is the simplest of the two types. It is also the most affordable.
As the name suggests, it covers you for a set term ranging from 1 to 30 years. It provides a death benefit to your beneficiaries at the face value of the policy. It offers several advantages making it worth considering as a temporary solution to cover the financial risks of your passing.
Pros and Cons of Term Life Insurance
The cost savings, of course, stands out as a clear benefit.
This savings has long-term advantages because your premium will stay the same for the length of the initial policy, depending on the terms of the policy. As long as you make the payments, your insurance company can’t cancel it. It’s a cost-effective way to protect your family.
Most policies will renew automatically, offering coverage to age 90, or later. However, your premiums may increase with each new term beyond the initial planned duration.
This is why a 30-year term life insurance policy makes sense for a younger individual. You can lock in a favorable rate since premiums are generally lower for young people versus older folks.
There is some flexibility with term life insurance so you can better match a policy for your needs.
You can opt for one which renews annually for situations where you need a temporary solution. The advantage is you’ll forgo proving you’re insurable, but at the cost of higher premiums.
You may also have an opportunity to exchange it for a whole life insurance policy.
What Is Whole Life Insurance?
Whole life insurance takes the basic premise of a term life insurance policy several steps further.
Unlike a term policy, whole life insurance covers you for your entire life, as long you live. It provides a death benefit to your family, similar to term life insurance. It differs in one key aspect.
In addition to this benefit, there is also a living component regarding its cash value.
Pros and Cons of Whole Life Insurance
The cash value of whole life insurance comes with both pros and cons.
On the plus side, a portion of your premium is allocated to savings portion. It carries many of the benefits associated with a 401(k) or IRA. It accrues interest, albeit, at a small rate. However, it is tax-deferred and unlimited. The cash value has other advantages, too.
You can withdraw from this portion or take a loan against it. Both are tax-free as long as you stay below its basis.
Otherwise, you will pay income tax on this portion. You don’t have to pay back a loan.
However, the amount will be deducted from the death benefit, something to keep in mind.
Now the bad news.
Premiums for a whole life insurance policy are much larger than term life insurance because you’re paying into the cash value, and the permanent death benefit.
And the insurer does not pay it out upon your death.
However, you can also use your cash value to pay your premiums, giving you an added bit of flexibility. You can make the cash value of your policy work for you.
Features of Both Types of Insurance
There are several common features between the two types of insurance.
- Both pay out a death benefit which is generally tax-free, a benefit for your family.
- Each one has some window of guaranteed premiums during their duration, depending on your plan and its renewability. You can avoid any unpleasant surprises with skyrocketing rates or needs to prove your insurability.
- Both provide the security of protection for your family as long as you make your payments.
- With whole life and longer term policies, you also have the advantage of guaranteed coverage.
You also have the flexibility of tweaking your life insurance needs with your long-term savings, when needed. Using the cost of a whole life insurance policy as your basis, you can allocate funds to serve you best.
Get The Best of Both Worlds
If you want to add saving to your long-term plan, you have two options.
- You can get a whole life insurance policy including this component. The interest may not be high, but you won’t lose money on your investment. It offers an excellent safe choice serving both purposes, with the flexibility of tax-free withdrawals or loans.
- Your other option is to take out a term life insurance policy. Instead of an insurance company managing your money, you can take on the responsibility yourself. You can put the extra money you’d be paying on a whole life insurance policy and put those funds into a mutual fund or another type of investment. You’ll have the security of a death benefit and the chance to make more.
The clear advantage with both term and whole life insurance is their simplicity. You know what to expect from your policy. Each one offers an opportunity to add to your savings.
You can rely on the cash value of whole life insurance or the investment you make alongside a term life insurance.
With either one, you have the flexibility to see to the financial security of your family.