Last Updated on September 21, 2020 by Andrew Lee
Life insurance is one of the best ways to protect and provide for your loved ones even when you’re gone. It gives you the assurance that your family won’t suffer severely from the devastating financial losses caused by your passing. With a policy, your family will remain financially stable despite you no longer being around.
The question is, which type of cover should you get? The answer varies from person to person and household to household, so it’s crucial you take the time to first establish your insurance needs and preferences. This guide containing a comparison of the two basic policy types, namely: term life insurance and whole life insurance, will help you make the wisest decision.
Term Life Insurance: The Most Important Facts
Term insurance is the simplest to understand the two types of policies. Choose this, and you have insurance for a specified time. You just have to select a term – length of time you want the coverage for – and a policy value – the amount of death benefit it’ll pay out when you pass away during the term of the contract with your insurer.
This type of life cover basically works the same in all states, so when obtaining quotes, you’ll notice that premiums for a healthy, non-smoking male aged 30 living in Delaware may be similar to one residing in Florida or Georgia.
You have quite a number of term levels to choose from, and you should base your decision on your current health, age, and financial status. Before, the most popular was the yearly-renewable term (also known as annually-renewable), but the 20-year term has long since surpassed it. Your other choices include 5-year, 10-year, 15-year, 25-year, and 30-year terms. You may also opt for an age-specified term, which in most cases, provides coverage until the age of 65.
Because term life insurance doesn’t come with a cash-value component, it costs less than whole life.
The Features That Make Term Life Insurance Appealing
Many individuals and families choose term life for their first policy, which with its straightforwardness and affordability. Consider these benefits and advantages that come with this particular type of life coverage:
- Lower cost. You can expect lower premiums with a term policy since it protects you for a specified amount of time. Another reason is that all your premiums go into just the coverage, unlike with whole life that a portion goes into a “savings” account.
- Greater flexibility. As mentioned above, you can choose from a wide array of terms, from a year up to 30. Or, you can specify the age you want the coverage to last.
- Simple and easy to understand. With term insurance, you most likely won’t get confused, seeing as its sole purpose is to pay out a death benefit.
How About Whole Life Insurance?
Although more people in the United States favor term life insurance, it doesn’t mean you should no longer consider whole life. There are plenty of financial benefits a well-designed whole life policy can deliver, and these go beyond the death benefit it provides.
At its core, this type of life cover combines insurance with a cash value component. A portion of your premiums will go to a savings account, which is why it generally costs more than term. As you keep making payments toward your policy, the savings account will grow. And once it has accumulated enough (the definition of which depends on your insurer), you can already borrow against it or make a withdrawal. You can then use the money for expenses such as school tuition fees, mortgages, or emergencies.
Whole Life Insurance Features Contributing to a Sound Financial Plan
Take a look at this list highlighting some of the financial features of a well-designed whole life policy that makes it an ideal part of a financial plan.
- Protection for life. Just keep paying your premiums, and you have coverage for life.
- Ever-increasing cash value. Stock market volatility doesn’t impact a whole life policy’s accumulated cash value. Whatever happens to the stock market, this will continue growing at a fixed rate.
- An additional source of income and funds. You can have your policy’s cash value converted into an annuity. This can then serve as an additional source of income for life. It also provides you with extra funds that you can use to cover other expenses while you’re still enjoying life.
The Verdict: Which one should you go for?
Knowing how term and whole life insurance work and differ from each other is critical to making the correct decision. If you’re still young and have many other financial responsibilities, a term policy might work best for you. However, if you can afford higher premiums and want to expand your investment portfolio, you should take a closer look at whole life insurance offers.