What is the Difference Between Term and Whole Life Insurance?
Statistics show that almost 40% of Americans will end up leaving their families in some sort of financial distress when they die, and it’s not necessarily for the reasons you may think.
Many of these people mean well and have some sort of provisions in place, but the issue is that as many as 70% of people with existing policies are underinsured. As a result, it is essential that people looking into life insurance policies don’t just go with the first option they find. One of the first decisions you will make is between term and whole life insurance. Here’s what separates the two.
Term Life Insurance Explained
The central tenet of all term life insurance policies is that they supply coverage for a given period of time, hence the title “term.” If you purchase a term policy and die within that term, your named beneficiary will get the payout. How much they get and how long the term lasts is determined by the terms of the policy. Terms are generally set for 10, 20, or 30 years.
The payout for a term life insurance policy and the monthly cost remains the same over the length of the term. Therefore most people consider term life the more simple and affordable of the two options. The main drawback of this, though, is that you will not have full coverage for your entire life.
Whole Life Insurance Explained
Whole life insurance means just that, a policy that will cover your entire lifespan. Because of the added coverage, these policies are generally more expensive in terms of premiums. However, there’s another major investment component that separates this from term life policies. As you continue to make more and more premium payments, the policy will eventually begin to accrue its own cash value. In some cases, this may even include a dividend component if you have the policy long enough.
Once cash value accumulates it enables people to do is either borrow money against their policy according to the terms of the policy. However, this ability comes at a cost, as you may reduce your death benefit or forfeit it completely depending on your actions.
What Type of Life Insurance is Best For You?
So, with that in mind, what exactly is the best option out of the two? It largely depends on where you and your beneficiaries are in their lives. For example, many younger people just starting a family may opt to get a term life insurance policy that will cover the years while their children are growing up, then come to an end at the point that the children will be able to provide for themselves. This way, if they were to pass away prematurely, the family would at least have some measure of protection against financial hardship. Note that if you want to convert your term life policy to a whole life policy later on, most providers will give you that option.
By comparison, a whole-life policy is generally a good fit for those who have more specific, long term financial goals. For example, a whole life policy can be paid into a special needs trust, in case you have a dependent that will require permanent care after you’re gone.
Whole-life policies are often used for people who have substantial assets. The money from the policy can go towards helping your loved ones pay estate taxes or create an equal inheritance between multiple children. With this said, you don’t need to be wealthy to make use of a whole life policy. Some people who are heading into retirement age get very small policies just to allow them to use their savings freely without putting their families into financial hardship due to funeral expenses.
Part of getting a life insurance policy is understanding that it’s not a one-size-fits-all scenario. Based on the age, health status, and goals you have when it comes to a policy, you’re going to need to choose an option that fits you best. That’s why partnering with an insurance expert who can explain the differences to you and make a recommendation based on your needs.