You’ve decided you need life insurance. Great. Now you need to decide which type of life insurance you need. Life insurance policies aren’t all the same. There’s actually a wide range of coverage types, and they each come with their own advantages and disadvantages. So what’s the right life insurance policy for you? Here’s what you need to know about the difference between term insurance and whole life insurance.
Term vs. Whole Life Insurance
Term life insurance is designed to last for a predetermined period of time. The term lengths vary considerably, but they are often for five, 10, 20 or 30 years. If the insured dies during this coverage period, the death benefit is paid to the beneficiary, barring any coverage exclusions.
When the term ends, the policy expires. This means that the policyholder no longer needs to make premium payments. It also means that there will be no death benefit if the insured dies. If the policyholder is fine with this, no action is needed. However, the policyholder may want coverage to continue. In this case, the policyholder may be able to renew the policy, purchase a new life policy or convert the term life insurance policy into a permanent life insurance policy.
Whole life insurance is a type of permanent life insurance. Like term life insurance, whole life insurance pays a death benefit if the insured dies. However, unlike term life insurance, whole life insurance and other permanent life insurance policies do not have a set expiration date. They can remain active for the insured’s entire life, assuming the policyholder keeps up with the premium payments.
Whole life insurance policies also have a savings aspect to them. These policies can accrue a cash value, and policyholders can access this cash value during their lifetimes.
Universal life insurance is another common type of permanent life insurance. Like whole life insurance, universal life insurance does not expire, and it accrues a cash value. However, while whole life insurance has a fixed premium and death benefit amount, universal life insurance is more flexible.
When considering your life insurance options, it’s important to look at both the pros and cons.
Term Life Insurance: Pros and Cons
Term life insurance has several advantages. First of all, it tends to be relatively affordable. Premiums will vary based on a number of criteria, including the applicant’s various risk factors, such as age, health, medical history and activities. The length of the term and the benefit amount will also impact the premium. However, for applicants who are relatively young and healthy, it’s often possible to get a death benefit of $250,000 or even $500,000 for under $20 per month.
Term life insurance is also fairly straightforward. For people who just want some financial protection to ensure that their loved ones will be taken care of, term life insurance provides a simple solution and peace of mind.
However, there are also disadvantages. Term life insurance does not build a cash value. If the insured outlives the insurance policy, the premiums are not returned, and the policyholder no longer has benefits. Of course, this is how insurance often works, whether we’re talking about life insurance, homeowners insurance or auto insurance. You pay for coverage in case there’s a claim, but you hope you never actually have a claim.
An important exception to this is term life insurance policies with a return-of-premium benefit. If the insured outlives the policy, return-of-premium life insurance does return the premiums. However, the drawback is that these policies can be much more expensive than regular term life insurance.