August 13, 2020

When considering life insurance coverage options, it is important to understand the differences between term vs whole life insurance. Whole life insurance is a way to provide yourself extra income in retirement, as well as lifelong coverage. Term life insurance, on the other hand, is less expensive because it provides coverage for a limited time. 

Learn everything you need to know about term vs whole life insurance policies. Learn about the benefits and drawbacks of each type of life insurance. And, find out how the benefits compare for whole or term life insurance policies. 

Term vs Whole Life Insurance: Which One Should You Choose?

When it comes to choosing term vs whole life insurance, you have to take into consideration the different benefits between the two. The biggest difference between term and whole life insurance is the longevity of coverage. Term life insurance provides coverage for a predetermined period of years – usually, up to around 30 years. 

Whole life insurance involves more complicating factors which makes online quotes more difficult to give out. It carries a higher monthly premium than that of term life insurance, however, it also carries greater benefits for policyholders. But, to begin with, it is easiest to get a grasp on the ins-and-outs of term life insurance.  

How to Understand Term Life Insurance

The original intent of life insurance is to provide coverage for an individual’s unintended and unexpected death. Term life insurance still holds true to this purpose. It provides coverage for a limited time, in which the policyholder’s beneficiaries receive a payout if they die. 

Often, term life insurance policies are available in 10, 20, and 30-year increments. Term policies hold a flat value for the agreed-upon timeframe. So, for term life insurance, your premium and benefits do not increase over time. 

The amount of term life insurance that is most efficacious for you depends on several factors. You want to focus on the years in which you are liable for bills so that they do not become a burden to your next of kin in the event of your untimely death. And, it must be compensatory to the financial burden you currently hold, such as the costs of child support, schooling, and current level of debt. 

The goal with term life insurance is to align your policies timeline with your end of life, as closely as possible. This is only possible to a point. But, if you give yourself a wide enough margin of error, your term life insurance policy will serve its purpose to assist your loved ones in their time of need. 

How to Understand Whole Life Insurance

Whole life insurance serves a greater purpose than term life insurance. Term vs whole life insurance serves a predefined period, whereas whole life insurance provides coverage to the point of your passing. The biggest difference for whole life insurance is that it also serves as an investment. 

Whole life insurance policies carry a cash value, which increases over time. The cash value sits in an account where it slowly accrues interest. And, it is tax-deferred, to relive the policy holders’ tax liability. 

Also, whole life insurance policies serve as a form of credit, which you can borrow money against. The money you borrow on this credit, however, must be paid back with interest, lest the cash value decreases. Also, you can withdraw the entire cash value at any time, therein surrendering your policy coverage. 

The simplest form of whole life insurance is called permanent life insurance. With a permanent life insurance policy, the premium stays consistent for the life of the policy. Unlike term policies, there is a guaranteed death benefit and accrual rate of your cash value. 

Certain whole life insurance policies even pay dividends to the policyholder on an annual basis. Policyholders have the option to take dividends in cash or reinvest them into the cash value of the policy. Often, reinvesting dividends back into your policy is rewarded with additional benefits, like earning interest on the cash value, or decreasing the cost of your monthly premium.

How to Choose Term vs Whole Life Insurance

So, how do you know to pick a term vs whole life insurance policy? Look at it in terms of practicality and planning for the benefits that are most important for your circumstances. For instance, what’s the good of a life insurance policy with premiums that you starve to death trying to pay? 

For the majority of individuals, term life insurance provides the coverage essential in the event of unexpected loss. It serves to replace income loss for a specified period, and it is affordable for most household budgets. Furthermore, most term life insurance policies allow the holder to easily transfer their existing policy into a whole life insurance coverage, for a window of time within the life of the policy.

Even if the price is no object, a term policy allows you to use the money you are saving to invest wherever you see fit. On the other hand, a whole life insurance policy is a means of savings that is dependable and guaranteed. Also, these policies can be used as an investment into a trust for lifelong dependents, ensuring their financial solvency after your passing.

Your life insurance can make a big difference in achieving the legacy you want in life and leaving your heirs with an inheritance for the future. Choosing the right type of insurance can be a complicated one, with many factors that affect your life and finances. For help weighing your term vs whole life insurance options, contact an insurance specialist, today.