Are you one of the 59 percent of Americans who have life insurance – and if so – do you have term or whole?
If you have life insurance at all right now, you’ve made a savvy financial decision.
Life insurance doesn’t just provide the funds needed for your final expenses. It ensures your dependents have the money to stay out of financial hardship when you’re no longer capable or there to provide for them.
If your time to purchase has come, you might be wondering which is the better option between term life insurance and whole life insurance.
If that’s your dilemma, you’ve come to the right place. We’re diving deeper into these life insurance policies and in the process, we will fish out the difference and similarities. In the end, you’ll have the information you need to make the right choice.
I’m the bestselling author of a health-boosting longevity book, Life is Long. In my book I share how to protect your health with research based health information. I write a lot about living longer. But in this article I want to share about how to protect the money you leave your family when you pass – by exploring the best life insurance for you.
To have a better understanding of term life and whole life insurance, it’s essential to start by understanding how life insurance works.
Life insurance is a contract between you (the policyholder) and an insurance company. You pay premiums (monthly or annual) to the insurer, and in return, the insurer will pay a death benefit to your elected beneficiary upon your passing. Simplelifeinsure.com has a resource that can help you find a reliable life insurance company.
There are several terms and conditions that keep the contract in force. For instance, you have to stay on top of your premium payments for the policy to stay active. Also, there are types of death, such as suicide, that can invalidate a life insurance policy.
Now, there are different types of life insurance policies, each with unique terms and features, but at the heart of all them, is a death benefit. Broadly speaking, there are two types of life insurance: term life and permanent life.
Term life insurance providers coverage for a specific, pre-defined amount of time. If the policyholder dies within this time, the insurer will pay out the death benefit to the beneficiaries.
Here’s an example.
You take a term a 10-year term life insurance policy. The policy will expire after this period if you don’t pass on. In the event of policyholder death, however, the insurer will pay out the death benefit.
Whole life insurance is a type of permanent life insurance.
Permanent life insurance is the exact opposite of term life insurance. It has no term limits. It doesn’t expire. When you have permanent life insurance, you’ll pay premiums until you hit a pre-determined age, such as 100, after which the policy will remain in force until the day you die. The insurer will then pay out your death benefits to your beneficiaries.
There are different types of permanent life insurance:
Whole life insurance, as you can already guess, doesn’t expire. Depending on the terms on your contract, you’ll pay premiums until you reach a certain age. The policy will remain valid until you die.
Whole life insurance, like most permanent life insurance policies, has a cash value component. In simpler words, this is like a savings account. Part of the premiums you pay will go to the cash value component while the rest will go to the maintenance of the death benefits.
The cash value component means you’ll build savings over the long term. After a certain period or after your savings reach a certain amount, your insurer can allow you to withdraw your savings or take out a loan against them.
Now that you know the main differences between life insurance and whole life insurance, which policy is right for you?
It depends on a number of factors, as fleshed out below.
Whole life insurance premiums are higher than those of term life insurance.
As such, if your current financial situation means you won’t be able to afford whole life insurance, it’s prudent to go for the cheaper option: term life insurance.
The better news is most insurers allow policyholders to convert term life insurance to permanent life insurance. If your financial situation improves later on in life, you can then convert your term life policy to whole life.
For most people who buy life insurance, their death benefits are meant to help dependents financially.
If you’ve got toddlers, for instance, you might find a term life policy more attractive. If you buy a 20-year policy, for instance, and you die within this period, they can use your death benefits to pay for their education and living expenses until they can support themselves.
However, if you have a life-long dependent, such as a child with special needs, you will need whole life insurance.
Your age has a direct impact on your life insurance premiums. The younger you are, the lower your premiums. As you get older, premiums increase, and it can be more challenging to get coverage.
When choosing between term life insurance and whole life insurance, consider your age.
If you’re just starting out in life, for instance, term life insurance is more suitable. It’s cheaper and enables you to protect your dependents from uncertainties as you work toward increasing your wealth.
However, if you can afford whole life insurance when you’re younger, the better. You’ll be able to start saving early because of the cash value component. You can tap into these funds later on in life.
What’s more, whole life insurance premiums are fixed. At a young age, you’ll get lower premiums, which be locked in until you hit the age when you’re no longer required to pay premiums.
Term life insurance and whole life insurance are both ideal financial tools you can utilize to plan your future. Term life is cheaper and has an expiry date while whole life is more expensive and doesn’t expire. The one you choose ultimately depends on your specific financial and life circumstances.