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Did you know that 54% of Americans are covered by life insurance? If you care about your dependents, you’re probably thinking about taking out a life insurance policy. But just like with other types of insurance policies, you have to decide the kind of coverage you want.
When shopping for life insurance, you will mostly come across term and whole term insurance. Which one is right for you? You need to know the difference between term vs. whole life insurance to answer this question.
If the differences between the two life insurance policies sound vague, read on to learn what each means and the features that set them apart.
What Is Term Life Insurance?
Term life insurance will cover you for a specific period of time, usually between 10 and 30 years. You might hear people refer to it as “pure life insurance.” This term means that the goal of the insurance is to guarantee payment of a death benefit to your beneficiaries in case you die during the agreed term.
If you outlive the term insurance, you don’t get any payout. You can either renew the insurance, convert it to whole life coverage, or terminate it. The insurance company will recalculate your premium depending on your age during the renewal period.
What Is Whole Life Insurance?
This is permanent life insurance that will cover you for your entire life as long as you continue paying premiums. The insurance comes with a cash value component. This component means that the insurance provider will invest part of your premium.
You can use the policy’s cash value while alive to borrow money against it. You can use the money to pay your premiums or transfer it to your retirement savings. Whole life insurance is simple because you pay a constant premium for life and get guaranteed death benefits.
The Distinguishing Features of Term Vs. Whole Life Insurance
You can tell the difference between life and whole life insurance by the features of each type of policy. Some of the main differentiating features include:
Premium
You will pay a higher premium if you choose a whole life policy. The high premium is in exchange for the certainty that your insurer will pay a death benefit after your death. Your premiums will also remain the same during the coverage period.
The premium for term life insurance is lower. The rationale for the low premium is that the policy may expire before your insurer pays the death benefits.
The possibility of not paying death benefits means that the insurer’s overall risk is lower than in the whole life policy. The low risk makes it easy for the insurance provider to pass the cost savings to you by lowering your premiums. These premiums may remain the same or change over time.
Various factors will affect the premium you pay for both term and life insurance. One is age, whereby if your life expectancy is longer, your premium will be cheaper. You’ll pay more for a policy if you take it later in life.
Another factor that the insurer will use to calculate your premium is your health. The insurer will charge you a higher premium if you have chronic health issues. Other key factors include the coverage amount and the term length.
Coverage
Whole life insurance means you’ll get permanent life coverage. The policy will remain in force during your entire life as long as you pay the premium according to your insurer’s terms. In other words, the policy won’t expire and will remain in effect until you pass on.
On the contrary, term life insurance will not cover you for your entire life. It will only cover you for an agreed period, after which it will expire. If the policy expires while you’re still alive, your insurer will not pay any death benefits.
Life insurance will only serve as a financial cushion for your family when they need it most. It will pay off your mortgage or pay school fees for your dependents. The limited benefits make term life policies cheaper than whole life insurance.
Cash Value
Whole life insurance will help you build a cash value by funneling a portion of your premium to a savings component in the policy. The more premiums you pay, the more cash value you will have.
The benefit of the cash value is that you can withdraw it as a loan. For instance, if you have an emergency medical bill, you can contact your insurance company and withdraw some cash from your policy. As long as you repay the loan and any accrued interest, your beneficiaries will receive the full coverage benefit.
You can also access the cash value by using it to pay your premiums. Alternatively, you can surrender your life insurance policy for its cash value. Surrendering means you’ll cancel your policy and receive the amount you have contributed towards the cash value and the interest.
Term life insurance does not have a cash value. The policy doesn’t have any other value other than a guaranteed death benefit in the event of your death. Its main role is to replace your income if you die.
Term Life Insurance Guide
Now that you know how to choose the right type of life insurance let’s refine the decision-making process by telling you when to select term life insurance. This type of life insurance is suitable if you:
Want Life Insurance To Cover a Short-Term Need
A term life insurance will act as a replacement for your income in the event of your death. It is, therefore, suitable if you want to cover short-term financial obligations for your family. Examples include paying off your mortgage or raising your kids until they can live independently.
You may need senior life insurance if you’re a senior responsible for dependents and debts but lack adequate savings. Term life senior insurance will be an affordable option to help you cover your temporary financial needs, even when you think you’re uninsurable.
Have a Limited Budget
Term life insurance is a cheaper option than whole life insurance. It’s the best option if you don’t want to break your bank by paying hefty monthly premiums.
Since you’ll be setting the length of your insurance policy, you’ll ensure that you only pay for the insurance you need. You’ll only buy term life insurance for the years you’ll benefit from it, like when raising your kids.
Believe You’ll Need Whole Life Insurance Later
You can start with term life insurance if you feel that you will need permanent life insurance later but can’t afford it currently. Your insurance company might allow you to convert your term life policy into a whole life policy. This will be an excellent opportunity to continue your life insurance and get cash value.
You’re Not Interested in an Investment Option
You can choose a term life policy if you want to invest your money elsewhere other than in life insurance. In other words, choose a term life policy if you don’t want to mix investment with insurance.
The option means you’ll only spend less on premiums and direct the rest of your money to more productive and profitable investments than a life insurance plan.
Whole Life Insurance Guide
There are instances where a permanent life cover will be the best option for you. You should consider it if:
Have a Higher Budget
Whole life insurance is better if you can afford to pay high premiums. Since it’s a lifelong commitment, you should ensure you have enough money to pay the premiums without defaulting. Your policy may lapse if you don’t keep up with the monthly payments.
Want Guaranteed Payouts
If you want assurance that your heirs will have money after your death, choose whole life insurance. Your insurer will pay the death benefits irrespective of when you kick the bucket. Your heirs will receive the payout directly if you name them as beneficiaries.
Have a Dependent With a Disability
You can use permanent life insurance to fund a trust that will care for your disabled dependent after you die. However, you need to consult a financial advisor to help you set up the trust.
Want Insurance and Investment in One Package
You’ll get insurance and an investment opportunity in a whole life policy. The cash value will be your investment and will grow at the rate set by your insurance company. You can use the money for anything you want, including emergencies.
Know the Terms vs. Whole Life Insurance Differences and Choose the Best Option
You need life insurance if you want a better life for your dependents. However, you should know the difference between term vs. whole life insurance so you can choose the option that will give them more peace of mind.
Our guide tells you about the differences and when it’s appropriate to choose either term or whole life insurance. Leverage the information and make an informed decision.
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