Nobody wants to think about the implications of purchasing life insurance. However, whether you’re 25 or 65, it is important to consider whether or not your family will be in a stable situation when you are no longer there to care for them.
Deciding whether you need a life insurance policy that covers a set period of time or one that lasts for your entire life can feel daunting. This article will help you better understand the differences between term life and whole life insurance, as well as which you will benefit the most from.
Term Life Insurance
This type of insurance is usually referred to as “pure life insurance” because its purpose is to protect your family in the case of premature death. This type of policy can have a term of anywhere between one year and 30 years, depending on the insurer and various other factors. On average, the typical term life insurance coverage is 20 years, and your premium will remain fixed throughout the full term.
With a term policy, if you die within the covered span of time, your beneficiaries will receive the full benefit of your policy. However, outside of premature death within the covered time period, this type of policy has no other value.
Despite this being the sole purpose of term life insurance, for many people, this is sufficient coverage.
Whole Life Insurance
This type of coverage is also called permanent life insurance, or “perm life.” As you might expect, these policies provide lifelong coverage. They also offer an investment component for additional benefit. This facet of a whole life policy is called the cash value, and its gains are tax-deferred, so you do not pay any additional taxes on the gains while they accrue. The cash value of your policy essentially gives you a line of equity to borrow against, though you can also liquidate the policy for its current cash value. However, if policy loans are not repaid in a timely manner with accrued interest, it will reduce the final benefits of the policy.
Whole life insurance is a more complex policy, but it also offers more potential benefits for both you and your family. Not only is there a cash value and an opportunity to accumulate interest, but there are also certain policies that are eligible for earning yearly dividends.
How to Choose
The first factor to take into consideration is cost. Naturally, because term life is temporary and very specific, it will cost far less than whole life. While this isn’t the only factor, it is still one to take into account. This article from Forbes goes more in-depth about specifics to consider when looking at cost.
Another important thing to consider is your overall circumstances. Things to carefully consider when choosing a policy include:
- Your age
- Your current health situation
- The current state of your will
- Mortgages and other debts
- The future financial needs of your beneficiaries
There are no straight comparisons between term life and whole life insurance because they function so differently. If you are relatively young, healthy and in a stable financial situation, term life is usually sufficient. It is also important to note that most term life policies can be rolled into permanent life policies if you choose.
Ultimately, only you will know what best suits your needs. To help a bit with your decision though, here is a brief overview of who benefits the most from each policy.
Term life is the best choice in the following cases:
- You are only in need of a contingency plan during a set period of time, such as when your children are young or you are saddled with significant debts like a mortgage.
- You are looking for a basic, affordable way to protect your family.
- You are considering whole life insurance but are unable to afford the premiums.
Whole life is the best option for those who:
- Know they need coverage for the rest of their life
- Want to provide the family with a stress-free way to pay off estate taxes
- Have a special needs child
- Want to set up a trust for their heirs
- Want additional assets for the remainder of their life
Remember, whether you are choosing term life or permanent life insurance, this is not a decision to make lightly. Be sure to do your research and speak with a few different insurance agencies to ensure you’re getting the most benefit for the price. Don’t be afraid to ask questions, shop around and speak to a professional.