Buying a life insurance policy can be intimating at first, but once you understand the difference between whole life and term life insurance, it gets easier to navigate.
Here’s how to choose between whole and term life insurance when buying your first policy.
Term Life Insurance
Term life insurance is a life insurance policy that provides coverage for a fixed term, usually between 10 to 30 years. Your life insurance coverage stops once the term you’ve selected is over. Term life can offer the essential coverage to ensure that no dependents would go without if your income was suddenly lost for an affordable premium.
Term life insurance is the more affordable option compared to whole life insurance. You only pay for the protection you need for however long you think you need it.
At up to 30 years, term life plans are typically long enough to cover many life circumstances, such as protecting a spouse until retirement age or covering a dependent minor until they’re a financially independent adult.
Although term life has more affordable premiums, your costs can increase if you want to continue the coverage beyond your term. What’s more, adding value to your life insurance may be impossible, and you might need to purchase an additional plan to increase your death benefit.
Another disadvantage to term life insurance is that your policy has no cash value, so you won’t be able to access funds from your policy while you’re still alive.
Finally, there is the fact that ideally, term life insurance does not pay out a penny, as you would outlive your term plan. While this is a best-case scenario for you and your loved ones, it does mean the money put into a term plan never sees a return.
Whole Life Insurance
Whole life insurance supplies you with permanent coverage for your entire life, however long that may be. You’ll pay a fixed amount for your monthly premium that doesn’t change, so there are no surprises in the future.
Your whole life policy doesn’t expire as long you’re able to make your monthly payments, meaning that your beneficiary will eventually receive a guaranteed death benefit.
One benefit of whole life is building cash value that will grow throughout your policy. As your policy matures, you can pull funds from it to cover unexpected costs, or even to pay your premiums.
Whole life insurance can be much more expensive depending on your income, age and health.
If your policy lapses due to nonpayment of your premium, you may face surrender charges of up to 10% of the cash value.
Although pulling funds from your policy when you need it can be a benefit, having outstanding loans against your cash value can reduce the amount of your death benefit.
The Bottom Line
Term life insurance is an affordable way to protect your loved ones for a set amount of time, and the whole life is a lifetime financial tool that can benefit you in multiple ways. The ultimate decision about which life insurance policy is best will come from you. You know your finances and your personal needs best.
As you continue exploring your options and reviewing your resources, you can make an informed decision knowing that your family’s future is being protected.