If you’ve never bought life insurance before, it can be hard to know what to look for.
While your financial advisor may give you adequate knowledge of your options, it’s much better if you also have the knowledge yourself.
When comparing term vs. whole life insurance, consider how each type of policy works and the pros and cons of each.
What is term life insurance?
Term life insurance is a basic variety of life insurance. Term life insurance policies are active for a limited period or term; after which they expire.
The death benefit is paid only if you die within that term. If you die after the term is over, your beneficiaries receive nothing.
A term life policy isn’t meant to last forever; it’s designed for temporary gaps in coverage, such as when your children are young and dependent on you and your family.
If a policyholder outlives their term length, it’s likely because they were healthy and didn’t need their policy to be triggered.
What is whole life insurance?
Whole life insurance is a permanent life insurance variety. That means it’s designed to protect you for your entire life as long as you continue making premium payments on time.
Other types of permanent life insurance include universal and variable universal life insurance.
If you want lifelong coverage, whole life could be a good choice for you because it guarantees your premiums will remain the same and that the death benefit won’t decrease even if your health starts to fail in old age.
Term vs. Whole Life Insurance Cost
Term life insurance will cost you less compared to whole life insurance. That’s because whole life insurance policies are more complex and can be difficult for the carrier to price.
When you apply for a term policy on your next payday, the insurer will ask about your health and lifestyle (smoking, drinking, regular exercise). They use this information to predict how long you’re likely to live.
With that data in hand, they can estimate their risk and set a high monthly premium level to cover claims plus overhead. As long as you pay your premiums consistently, they guarantee your coverage through the policy’s end date.
With whole life insurance, it’s not so simple. As outlined above, part of the premium goes toward an investment account that grows tax-deferred.
This means that when a carrier underwrites new business (the industry term for issuing policies), they have a smaller pool of money available to cover claims.
This is why an average 35-year-old’s monthly premium will be much higher with permanent coverage than with term insurance—and why it will become less expensive as they age.
Choosing between Term and Whole Life Insurance
Term life insurance is typically more affordable in the short term but will require you to re-evaluate your coverage needs at the end of the term. As long as you think you’ll need coverage for less than 10 years, term life insurance is usually a good bet.
If you anticipate needing coverage longer than 10 years, however, you should consider whole life insurance. Whole life insurance premiums are more expensive, but they also tend to stay fixed over time.
Additionally, whole life policies have a cash value component that can be redeemed if needed while living and can supplement retirement income when it’s time to stop working and retire.
Other Life Insurance Options
While term life insurance and whole life insurance are the most common types of life insurance, there are other kinds to consider.
For example, if you’re looking for more flexibility in your coverage amount as well as payment options, then variable or universal life insurance may be right for you.
The former also allows you to invest part of your cash value in stocks or bonds.
Alternatively, if you’re concerned about unexpected end-of-life expenses, final expense insurance can pay for these costs so that your loved ones don’t have to dip into savings.
This type of coverage is usually a less expensive alternative to a traditional policy.
Suppose your health isn’t good enough to secure a regular policy but still want some form of coverage. In that case, no exam life insurance can provide protection after an interview with an agent and an examination of medical records.
Also, accidental death insurance is another option for those needing less comprehensive coverage at lower premium costs than traditional policies.
Finally, group life insurance plans offered by employers are another common way to obtain coverage. Typically, many employees at the same firm share the cost and benefit of this type of policy.
Knowing the difference between term and life insurance can significantly benefit you, especially when you’ve decided on getting one.