Comparing Term and Whole Life Insurance

When considering life insurance options, many people ask about the differences between term and whole life insurance. It can get a little confusing trying to determine which choice is best for you and your family. You may know it’s the responsible thing to do, and you want to make the right financial decision now and for your future, but understanding exactly why and which type of insurance to get takes a thoughtful examination of your personal situation.

Why You Should Pay for Life Insurance

First, let’s discuss the importance of life insurance. 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.

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. It may not be exactly fun to think about, but it's a responsible choice. 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.

Next, let's discuss the difference between term and whole life insurance, two of the most popular types of life insurance available.

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. If you pass away during the insurance policy term, 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 an affordable way to provide a benefit to their family in the case of their untimely death. Term life insurance is sufficient for most families.

Understanding Whole Life Insurance

Whole 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.

If you’re into investing, you may want to lean more toward whole life because it offers cash value investment options. The cash value is often tax deferred and increases at a guaranteed rate. 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 or leave alone to earn interest. But 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, 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, so 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 of your retirement savings, yet you want to leave an inheritance or provide for your final expenses.
  • You have a child with special needs who is a lifetime dependent and want to fund 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 personal situation when you’re selecting life insurance. For example, if you’re a married, stay-at-home spouse, you generally won’t need as much life insurance as your spouse since he or she is the main breadwinner of the home. But if you’re a single parent or the main income earner of the home, you’ll need more life insurance. 

The amount of benefits provided depends upon the plan selected, and the premium will vary with the amount of the benefits selected. Riders and conversion provisions are subject to additional costs.

In summary, 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, it’s better than nothing. The downside is since you’ll probably live to the end of the term, there won’t be any payout for anyone, but 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.

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