Term or whole life insurance: which one is right for you?

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Term life insurance and whole life insurance offer predictable benefits in the event of death, but they are very different financial products. (iStock)

If you have a family to support your family, you might want to consider life insurance as a way to protect it in the event of death. Life insurance pays a certain amount of money to your spouse, children or other beneficiaries when you die.

Term life insurance and whole life insurance are two common types of life insurance with many similarities but also key differences in the way you pay and the length of policies. When shopping for life insurance, it’s important to know the difference before you make your decision. Learn more about both types so you can choose the type of life insurance that’s right for your needs.

Credible allows you to compare life insurance rates through its partner, Policygenius.

Term or whole life insurance: what’s the difference?

A term life insurance policy lasts for a number of years and pays a benefit to your family if you die during that time. Whole life insurance also pays a death benefit and lasts a lifetime, but costs significantly more.

What is term life insurance?

Term life insurance is also called “pure insurance” because it works strictly like an insurance policy. The term is for a defined period of time – 10, 20 or 30 years, for example, or until an insured reaches a specific age. As long as you pay your monthly premiums, your beneficiaries receive the death benefit if you die within that time. You usually have the option of renewing your policy when you reach the end of the term.

Term insurance is cheaper than whole life insurance policies, although the costs will vary depending on your age and health when you buy the policy. For a healthy 40-year-old, the premium can cost anywhere from $ 60 to $ 70 per month for a benefit of $ 1 million.

What is whole life insurance?

Whole life insurance is much more complicated. This type of contract covers you with a specific death benefit until your death, regardless of your age.

Your premiums are paid into a type of savings account that is invested by the insurance company. As you pay, the cash value of your account increases. You may be able to borrow against this security, although you may lose your advantage if you don’t repay the loan. Unlike term life insurance, once you’ve created a cash value, you can get that value back from the policy if you terminate your entire life insurance policy.

Whole life insurance is much more expensive than term life insurance. That same 40-year-old man in the example above would pay $ 1,000 to $ 1,300 per month for a whole life policy with a benefit of $ 1 million.

You can use Policygenius, a credible partner, to shop around and compare life insurance rates.

Term or whole life insurance: advantages and disadvantages

When you evaluate the two types of life insurance, consider their advantages and disadvantages.

Term life insurance

Advantages

  • Lower cost – Term life insurance is significantly cheaper than whole life insurance for the same death benefit. You may be able to purchase an amount of coverage that you could not afford with a whole life policy.
  • Renewable – You may be able to renew your policy at the end of the term to maintain coverage. If you still want insurance after 20 years, for example, you may be able to renew it for another 20 years.
  • Predictable profit – Your benefit stays the same throughout, so you know exactly how much your beneficiaries would receive if you died. If you buy a policy with a $ 1 million benefit, you know that’s what your family will get as long as you continue to pay the premiums on your policy.

The inconvenients

  • Costs can increase – Your premiums can increase considerably when you renew at an older age. The 20-year policy you buy at 30 is likely to be cheaper than a 20-year policy that renews at 50.
  • No monetary value – If you cancel your policy or do not pay your premiums, you will not receive any refund. At the end of the contract, there is no accumulated savings.
  • Coverage ends – If you die after your term life insurance expires, your family will not receive any benefits.

Whole life insurance

Advantages

  • Lifetime coverage – Your coverage lasts your entire life, as long as you pay your premiums. If you die at the age of 100, your family will still receive a benefit if you are up to date on your policy.
  • Surrender value – Your whole life insurance policy has an increasing value over time against which you can borrow. You can also get back the cash value of the contract if you cancel your contract. In addition, you can receive dividends on your investment which you can use to pay your premiums or for any other expense.
  • Predictable profit – Your benefit will remain the same for the duration of your policy. A policy with a benefit of $ 1 million will pay that amount whether you die at age 40 or age 90.

The inconvenients

  • Higher cost – Whole life insurance is several times more expensive for the same benefit. These higher premiums mean you may not be able to purchase as much coverage. You may be able to afford a benefit of $ 1 million with term life insurance, but only $ 250,000 with a whole life policy, for example.
  • More risks involved – Whole life insurance is a more complex product and you could lose your coverage if you do not follow the rules on cash value loans or other provisions. You might also be tempted by the possibility of borrowing under your policy and have financial problems.
  • Low growth rate – If you are using whole life insurance as an investment, you may be disappointed with the returns and slow growth in the cash value of your policy.

Term or whole life insurance: how to choose

Consider these factors when choosing between term life insurance and whole life insurance:

  • Fees and premiums – Take a look at the monthly premiums and any other fees you will need to pay for either type of insurance and see if they fit your budget.
  • Payments – The death benefit is a crucial aspect of life insurance. Make sure you have enough coverage to take care of your family in the event of your death.
  • Surrender value – If you are weighing whole life insurance, pay attention to how the cash value is calculated and how much you might have access to.

When to consider term life insurance

  • You are a young and healthy person who wants to protect their family during their first few years of work at a lower cost.
  • Your financial goal is to pay off your mortgage or pay for your child’s college education.
  • You’re on a budget but still want coverage.
  • You prefer to invest your money with more flexibility and higher returns.

When to consider whole life insurance

  • You want a policy that will cover your entire life.
  • You want to make an investment that will grow over time.
  • You have dependents that you want to care for your whole life, such as a child with a disability.
  • You have a large amount of money to spend on life insurance coverage.

When you’re ready to purchase life insurance, use credible partner Policygenius to compare life insurance prices in minutes.

Other types of life insurance to consider

A term life insurance policy and whole life insurance are not your only choices. Here are other types of permanent life insurance you might want to consider:

  • Universal life insurance – This type of insurance is more flexible and allows you to adjust your premium payments once you reach a certain level of cash value in your account. Your investment grows at a rate similar to that of a money market account. This is also known as adjustable life insurance and can come in handy if your financial situation changes.
  • Indexed universal life insurance – These policies grow at a rate linked to a certain market index, such as the Dow Jones Industrial Average or the S&P 500. The rate you receive will likely be lower than the actual movement of the index.
  • Variable life insurance – Variable life insurance allows you to choose how your premiums are invested, but the death benefit and cash value of your policy may change depending on the performance of your investments.

When comparing the many types of life insurance available, you may want to consider working with a financial advisor or an insurance agent from a life insurance company to help you determine which type of policy is best for you. your financial needs. Also, remember that you are not tied to just one type of life insurance. You may be able to convert a font type to a new font as you get older.

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