05 Jul What is the Difference Between Term and Whole Life Insurance
This is a common question people ask when considering life insurance options. And it can get a little confusing trying to determine which choice is best for you and your family. You know that it’s the responsible thing to do, and you want to make the right financial decision not only for now but also for your future.
Why pay for life insurance?
First, let’s discuss the importance of life insurance. Honestly, if you’re barely making ends meet, it may be difficult to justify the expense of life insurance. However, there’s no doubt that the benefits outweigh any temporary inconvenience it may cause.
Why? Because life insurance isn’t something you do for yourself—it’s something you do to take care of your family in case something happens to you and you’re not around to provide for them anymore. Not exactly fun to think about, I know, but that’s what responsible people do, right?
Life insurance is one of the most loving things you can do for your family and provides a financial safety net for the ones you love. If you die prematurely, your dependents can use your life insurance payout (death benefit) to pay off the mortgage, fund college expenses, or pay for daycare.
You’re taking care of your family now, and you want to make sure that they’re taken care of after you’re gone too. And since none of us has a crystal ball or knows the future, life insurance makes a lot of sense.
So let’s talk about the difference between term and whole life insurance, two of the most popular types of life insurance out there.
Understanding Term life insurance
Term life insurance is the simplest type of life insurance. Basically, you buy it in either 10, 20, or 30-year terms and pay a set premium each month. It’s usually very reasonably priced, depending on how much life insurance you want or need. (Seek advice from a trusted financial advisor about how much life insurance is best for you.) If you pass away during the insurance policy term, then your beneficiaries receive the payout. There is no other value to the policy other than the one-time death benefit.
Many people choose term life insurance because it’s incredibly affordable in exchange for the benefit that their family will receive in case of their untimely death. Term life insurance is sufficient for most families.
Understanding Whole life insurance
Whole term life insurance (or permanent life insurance) is a bit more complicated. Like term life insurance, your premium usually doesn’t change, your beneficiaries receive a death benefit when you die, and the payout is guaranteed upon your death.
But there are some significant differences between term and whole life insurance. For example, whole life generally has higher monthly premiums. Also, whole life covers you for your entire life instead of just during the limited term of the policy.
And if you’re into investing, you may want to learn more toward whole life because it offers “cash value” investment options. The cash value is often tax-deferred and increases at a rate that’s guaranteed too. You can access your cash value through withdrawals and loans as well.
You can even earn annual dividends with some policies, which you can cash in, use to decrease your premium, buy additional coverage with, or leave alone to earn interest. But please note that dividends are not certain.
Choosing term life or whole life
So now that you understand the basic differences between term and whole life insurance, how do you choose which is best for you and your situation?
If you don’t have life insurance, yet you understand the importance of having it for your family, then you may want to start out with term life insurance. Likewise, if you really would like to get whole life insurance because of its long-term benefits but you cannot afford it, at least get started with term life insurance, and see if you can convert it to whole life insurance later. (Policies vary. Always read the fine print.)
Remember, having some kind of life insurance is better than no having life insurance.
There are certain situations in which whole life insurance just makes more sense, such as:
- You plan to spend all your retirement savings, yet you want to give an inheritance or provide for your final expenses.
- You have a child with special needs who is a lifetime dependent (consider speaking with your financial counselor about funding a Special Needs Trust with your life insurance policy).
- You want to balance out the inheritances you’re leaving. (If you’re giving a business or property to one child, your whole life policy can be given to the others.)
- You want your inheritors to be able to pay your estate taxes with the whole life death benefit so they don’t have to liquidate parts of the estate.
You also want to consider your age and sex when you’re selecting life insurance. For example, if you’re a married, stay-at-home mom, you generally won’t need as much life insurance as your husband since he’s the main breadwinner of the home. But if you’re a single mom and the main earner of the home, then you’ll need more life insurance in case you die prematurely. Consult with your financial advisor about what is right for you and your family.
The bottom line
To wrap this up, term life insurance is inexpensive because it’s not long-term, and there’s no investment piece to it. But as stated before, if it’s all you can afford, then it’s better than nothing. The only downside is that since you’ll probably live to the end of the term, there won’t be any payout for anyone (but, of course, being alive is a good thing!). On the other hand, whole life insurance costs more because it lasts your whole life (hence, the name), so there’s a guaranteed payout when you pass away. Additionally, there’s a cash value attached to whole life insurance, along with a return on your investment. Either way, get yourself covered and protect your family. You’ll be glad you did, and so will they.
The amount of benefits provided depends upon the plan selected and that the premium will vary with the amount of the benefits selected. Riders and conversion provisions are subject to additional costs.
