Shopping for life insurance can feel like a daunting task, with all the providers and all the coverage options to think through, but it’s actually more straightforward than you think once you have some of the basic terminologies down.
If you’ve done some reading up on life insurance, then you’ll know that there are several types you can buy which are designed for various needs and preferences. Term life insurance and whole life insurance are the two most popular types, but what are the differences, exactly, and how do you know which one is right for you?
In this article, we’re going to highlight everything you need to know about term life insurance and whole life insurance so you can quickly decide which fits your needs and start comparing life insurance rates.
Term Life Insurance
Term life insurance is a simple and affordable life insurance option, which is what makes it the most popular choice for those looking to buy life insurance. You select how long you want your coverage to last, you pay your monthly premiums, and in return, the insurer guarantees they’ll pay a “death benefit” to your beneficiary as long as it’s within the specified term.
The death benefit is the payout amount which can range anywhere from $250,000 up to $1 million and more. Most providers offering term life insurance offer coverage between 5 and 30 years. The longer the term and the greater the payout amount you choose, the higher the premium will be.
Since term life insurance only lasts the length of the term you choose, it’s far less expensive than whole life insurance, which is a policy that covers you for life.
Whole Life Insurance
Whole life insurance is exactly how it sounds. It’s a policy that gives you life-long coverage and never expires. Unlike term life insurance, it also comes with a cash value account.
One way to understand this cash value is like this: When buying into life insurance, everyone’s payments, or “premiums” contribute to a pool of money. When someone dies, the insurance company takes some of this money from the pool and pays that person’s beneficiary. The rest of the money is used by insurers to earn a small return by making conservative investments.
With term life insurance, you don’t ever see this invested pool of money. When you buy whole life insurance, however, the insurance company makes this pool of money visible to you. So you pay your premiums, you get your life-long coverage, and the insurer invests the money for you, building a cash value.
You can even borrow against this accumulated cash value in your policy, but you’ll have to pay yourself back with interest. If you need quick cash, a personal loan would be a better option than borrowing against your life insurance policy.
While this sounds like a great financial idea on the surface, there are drawbacks. For one, if you adjust your investment returns for inflation, you’ll likely find that it’s smaller than what you could be getting from other types of investments, like a Roth IRA or 401(k), for example.
The bottom line is it could take many years before your policy even accumulates a cash value that is equal to what you’ve put into it, and many insurers will charge fees for investing the money for you.
Term Vs Whole Life Insurance
Here’s a side-by-side comparison of both types of life insurance so you can easily see the differences.
|Term Life Insurance||Whole Life Insurance|
|A temporary policy that will expire||A permanent policy that covers you for life|
|Low-cost monthly premiums||Expensive monthly premiums|
|Premiums are fixed but will increase if renewed||Premiums are fixed as long as they’re paid|
|The death benefit to the beneficiary is tax-free||The death benefit to the beneficiary is tax-free|