Term vs. Whole Life Insurance
There are two main kinds to consider when it comes to life insurance: term and whole life. These two types of coverage cater to different needs, so it’s important to not only understand the difference between term vs. whole life insurance but also what you and your loved ones specifically need from a policy.
In short: term life insurance is coverage that lasts for a set period of time. Whole life insurance, on the other hand, is a form of permanent life insurance. Accordingly, it’s coverage for your entire life. Of course, there’s so much more to know about term and whole life insurance. Let’s get into the details, so you can decide which makes the most sense for your family.
How Does Term Life Insurance Work?
Since it’s designed to protect your family if you die prematurely, term life insurance only covers you for a specific number of years. Also known as pure life insurance, term coverage pays out a death benefit if you die during the term. Typically, life insurance companies offer a few options for term lengths. Common terms include 10, 20, and 30 years.
Term life insurance premiums are locked in when you purchase your coverage, So, the premium you pay for the duration of your term won’t change. When you compare term vs. whole life insurance, term coverage is more affordable. It’s cheaper because the coverage is only temporary. So, if you’re fortunate enough to outlive your term, then no one receives money when your coverage ends.
However, some life insurance companies give you the option to renew your policy or convert it to whole life coverage. As each name suggests, renewable term coverage allows you to extend your term life insurance, while convertible term life insurance enables you to convert your coverage to whole life insurance.
Term life insurance may be right for you if you:
- Have young children to support
- Want to retire soon and only need coverage for a little while
- Have a mortgage and want to leave money for your family to pay it off
- Want to save money on your coverage
How Does Whole Life Insurance Work?
Unlike term life insurance, whole life insurance is coverage that lasts your whole life. So, as long as you keep up with the premium, whole life insurance never expires. So, whenever you die, it pays out your loved ones.
Since it’s permanent coverage, whole life insurance is generally pricier than term life insurance. But when you compare term vs. whole life insurance, whole life coverage provides additional benefits.
For instance, it has a cash value feature that can be tapped into during your lifetime. If your whole life insurance builds up a significant cash value, then it’s a resource you can turn to if you need funds. In other words, a whole life policy can act as a savings vehicle. So, with a cash value policy, you can borrow against your policy or even cancel and redeem the cash value.
Whole life insurance policies have a surrender period that often lasts the first five to 10 years of the policy. During this period of time, there’s often a surrender fee or penalty if you cancel your policy. You may hear these fees called the cash surrender value. After the surrender period, surrender charges typically no longer apply.
If your policy is in its surrender period, then you often have the choice to take out a loan against your policy’s cash value. While you need to repay the loan and interest, you can avoid surrender fees. Additionally, whole life policies often give you the option to make a withdrawal from the cash value instead of cashing out the policy. So, if you want to access cash without canceling your policy, many whole life policies also offer that option.
Whole life coverage may be right for you if you:
- Need permanent coverage
- Want coverage that essentially acts as an investment account
The Bottom Line
The right life insurance policy for you depends on the unique needs of you and your family. As a result, it’s an incredibly personal decision. While we can’t say whether term or whole life insurance is better, we can help make the decision easier for you with a handy cheat sheet.
Term life insurance often suffices, but the added value that whole life insurance brings to the table can make it useful. Now that you know the difference between the policies, you can evaluate your needs and choose the coverage that works best for you.
As you consider term vs. whole life insurance, compare the best life insurance companies to make sure your family is protected.