One of the best ways you can protect your loved ones is by having a life insurance policy. But life insurance policies aren’t one-size-fits-all, and it’s essential to make sure that you purchase the plan that makes the most sense for you and your loved ones.
Here, we will examine the two primary types of life insurance policies: term life and whole life.
What is term life insurance?
Term life insurance expires after a set period, hence the name. Under this type of policy, the policyholder pays regular premiums for a set period, often 10-30 years. Should the policyholder die while the policy is in effect, their beneficiary or beneficiaries collect a death benefit payout.
Because term life policies expire after a set timeframe, they are best suited for those expecting to build wealth over their lifetime or don’t anticipate needing the financial safety net a whole life insurance policy provides later in life. Often, after 20-30 years, people have fewer financial obligations, such as paying a mortgage, covering college expenses, or having children at home. By this point, ideally, most people can utilize their savings to self-insure any remaining dependents instead of paying for a policy. While term life insurance is less expensive and set at a fixed cost, it also limits coverage to a certain period.
Pros of term life insurance
- Costs and benefits are predetermined at enrollment.
- It’s more affordable, relative to whole life insurance.
- Flexible policy terms to help build coverage to fit specific needs.
Cons of term life insurance
- Term life insurance coverage expires at the end of the term. This means that if you still need life insurance at that point, you will have to shop around for a new policy or convert your existing policy, at which point the policyholder may be considered uninsurable, or premiums may be higher.
What is whole life insurance?
Whole life insurance is permanent, meaning it stays in effect for your entire life. As you get older, this means that you won’t have to worry about potential uninsurability. It also has a cash value similar to an investment account you can borrow from, which is what makes this type of life insurance more expensive than term life insurance. Every month, a portion of your premium goes into the cash value of the policy, growing the policy’s cash value over time. The cash value can be used to take out a loan, help fund retirement, or fund policy premiums. The cash value can also be used to cover inheritance or estate taxes, which helps ensure that a greater percentage of inheritance amounts are passed to beneficiaries. When accessing the cash value, certain terms, conditions, and additional fees may apply.
Pros of whole life insurance
- Whole life insurance expires only upon the death of the policyholder.
- The cash value of a whole life insurance policy can be helpful in estate planning.
- A whole life insurance policy can work as a savings and investment vehicle.
- Those with a whole life insurance policy don’t have to worry about becoming uninsurable.
Cons of whole life insurance
- Whole life insurance is far more expensive than term life insurance.
- People may buy less coverage than they really need or end up surrendering their whole life insurance policy early due to the high cost.
- Other types of investments may offer higher interest rates or potential returns.
- The surrender value of the policy changes over time.
|Features||Term Life Insurance||Whole Life Insurance|
|Cost||$25-35/month*||5-15x more than term|
|Guaranteed death benefit amount||Yes||Yes|
|How cash value grows||N/A||Earns interest at a predetermined fixed rate|
|Risks||No risk of losing coverage, but no cash value when the term ends||No risk compared to the other permanent types, but you may find better investment options elsewhere|
Which is right for you?
The type of life insurance policy that is best for you depends on your financial position and reasoning for buying life insurance. The most commonly selected type is term life insurance due to its affordability and temporary coverage period. For those seeking long-term coverage or who need to protect an inheritance, whole life insurance may make more sense.
Term life insurance is best for those who:
- Are on a budget
- Expect to be able to self-insure via built wealth in the future
- Primarily want to leave behind a death benefit to replace lost income
Whole life insurance is best for those who:
- Have an estate that will be subject to an estate or inheritance tax
- Want to build cash value
- Anticipate ongoing expenses such as those related to a lifetime dependent
There are benefits and drawbacks to each type of life insurance policy; it all depends on your budget and personal circumstances.
Are you ready to find the life insurance policy that best suits your needs? Shop term and whole life insurance policies from top insurers on Policygenius and get an obligation-free life insurance quote today.
* Estimated term and whole life insurance costs based on policies offered by Policygenius in January 2021 from 11 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica. Monthly term life insurance rates are calculated based on a 20-year term life insurance policy for a non-smoker male in Preferred health rating. Actual rates will vary based on policy size and the age, gender, health, and hobbies of the insured. Please see https://www.policygenius.com/life-insurance/term-life-insurance-rates/ for specific examples.
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