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No one likes to think about death, but it’s inevitable. We all deal with it, and unless we plan for it, we could be left empty-handed.
One of the best ways to take care of your loved ones financially when you’re gone is life insurance. It’s an important piece of your financial plan, whether you buy term or whole life insurance.
Each policy has its pros and cons, which we discuss below to help you decide which life insurance policy is right for you.
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What Is Term Life Insurance?
Term life insurance, as the name suggests, lasts for a specific term. It covers your dependents if you die while you’re covered. Policies range from 10 years - 30 years in various increments depending on the company.
Most people buy term life insurance to cover a specific life event, such as paying off their mortgage or sending their kids to college. They buy the insurance to know their loved ones are well cared for if they die prematurely.
Term life insurance is the most affordable type of insurance and is the one most young adults get. The younger you are when you apply for life insurance, term or whole, the cheaper the premiums will be.
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How Does It Work?
When you buy term life insurance, you purchase it for a specific term and for a particular amount.
When choosing the proper term policy, you must select:
- How long you want coverage. Think about what you want to cover. Do you have kids, and you want enough money to carry them through until they’re 18 years old. Do you have a 30-year mortgage, or do you want to leave your spouse with enough money for him/her to live the life he/she is used to?
- How much coverage you need. Do you want to replace your annual income for a specific number of years? Do you want a certain amount of money for your kids to pay for college? These answers will determine the necessary coverage amount.
To get term life insurance, you will complete an application, answer questions about your health, and have a quick paramedical exam (usually takes less than 30 minutes). If approved, you make monthly premium payments.
If you’re alive when the policy expires, you can let it expire, buy another policy, or potentially renew the existing policy, but not all providers offer renewal.
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Who Should Buy It?
Even though term life insurance is only good for a specific term, it’s suitable for certain people. Buy a term policy if you want:
- Coverage for a specific event or to cover a specific amount of time
- Coverage until you are closer to retirement and have enough money saved to protect your loved ones
- Affordable coverage
- Temporary coverage that you can convert to a permanent policy in the future
What Is Whole Life Insurance?
Whole life insurance is a permanent life insurance policy (it lasts for your whole life). It also has an investment component.
Whole life insurance has a death benefit, much like a term policy, but it never expires. A portion of your premium covers the death benefit. The remaining amount grows in a tax-deferred account. Life insurance companies call it the cash value.
The difference between term and whole life insurance, besides how long it lasts, is the cash value. You can use the cash value while you’re alive by either borrowing against the value (and paying it back) or surrendering the policy for cash.
If you don’t pay back the amount you borrow, though, it decreases your death benefit or the amount your beneficiaries receive.
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How Does It Work?
Whole life insurance is more expensive than term life, but the premiums never change, and the death benefit is guaranteed as long as you pay the premiums.
When you die, if there is unused cash value, the insurance company absorbs the funds; your beneficiaries don’t receive it, but they receive the full amount of the death benefit.
The cash value on a whole life policy has a guaranteed rate of growth, and some policies pay cash dividends which you can either take or reinvest in your policy.
To get whole life insurance, you’ll complete an application, provide information about yourself, and undergo a medical exam. Whole life insurance policies are harder to get because the insurance company commits to insure you for your lifetime. They also charge higher premiums to make up for the risk that they will have to pay out at some point.
Who Should Buy It?
Even though whole life insurance is more expensive than term life insurance, certain people prefer it. Buy a whole life policy if you want:
- Coverage for someone who needs lifelong care, such as a child with special needs
- Enough money to cover your final expenses and/or to leave your loved ones with money outside of the money you saved for retirement
- Money to leave equal inheritances to all children
- Protection for a business you own
Term Life vs Whole Life - An Overview of the Differences
Comparing term vs whole life can seem confusing until you look at a breakdown of each. You need term life insurance if you want:
- Low premiums
- Temporary coverage
- Guaranteed payout
- Choice in the policy length
You need whole life insurance if you want:
- Coverage that lasts for your entire life (as long as you pay the premiums)
- Dividend payouts
- Cash value to borrow against or surrender
- Guaranteed payout
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How to Find the Right Life Insurance
It’s important to shop around for life insurance, just like you would shop for a loan or a car. Get a few quotes from providers and compare them, but make sure you compare apples to apples.
For example, don’t compare a 10-year term policy to a 30-year term policy or a 30-year term policy to a whole life policy because they aren’t the same thing.
As you look around at your options, shop with insurance agents in person, such as at State Farm or Allstate, but also look at online insurance providers, like Ladders. Online providers often have better programs and lower premiums because they have less overhead.
Do your due diligence and make sure any company you consider is highly rated with the Better Business Bureau and A.M. Best, Moody’s, or Standard & Poors.
The Bottom Line
Think of investing in life insurance as protecting your loved ones against the unexpected. Life insurance can pay for your final expenses or provide income supplementation for your loved ones.
Whether you want to leave behind a legacy, want to cover your final expenses, or want to make sure your dependents have everything they need despite your passing, choosing term or whole life insurance is an important step in your financial plan.