Dealing with life insurance is one of those things many people avoid. However, it’s one of the best ways to protect the financial health of your heirs. Life insurance will compensate your beneficiaries for the loss of your income after death or provide much-needed cash to pay off your debt accounts and other expenses. All insurance policies are not the same, though, and you’ll want to know the difference between term life vs. whole life insurance before making a decision. Here are few essential differences to help you decide which one is best for you.
How Does Term Life Insurance Work?
Term life insurance policies are for a specific period, typically 10, 20, or 30 years. This type of life insurance helps to replace your income so that your heirs can cover your debts and their living expenses, such as mortgage payments and tuition. It’s one of the most affordable types of life insurance, but if you live past the term specified, your heirs will not benefit from the policy. Once expired, you can renew, but the premium will be higher. If you choose not to renew, there’s no refund.
You have a couple of options when considering term life insurance:
- Level Premium: your premium payments remain the same for the term of your policy. When you renew, you can expect an increase.
- Annual renewable: Your insurance policy covers you for one year, and you can renew each year for a specific duration, such as ten years. Your premium will increase annually.
Some insurance companies offer “return of premium” term life insurance which returns your premiums should you outlive the term life policy. But the payments can be as much as 50% higher than standard life insurance policies.
How Does a Whole Life Insurance Policy Work?
Whole life insurance, also known as permanent life insurance, is in effect your entire life. Whole life insurance is more expensive than term life insurance, but your annual premium doesn’t increase as you get older or if your health deteriorates. Unlike term life insurance, your policy doesn’t expire.
Most whole life insurance policies mature at 100 years. If you outlive the policy, you might be entitled to receive the total cash value upon which time the policy is closed. Two additional options are:
- the insurer extends the policy, and you keep paying premiums, or
- the policy is maintained, but you no longer need to make payments.
The higher premium payments result in cash value over time, which you can withdraw under certain conditions. For instance, if you encounter a disruption in your financial life, such as job loss or illness, you can take a loan from the policy to cover your monthly bills. In this manner, whole life insurance can be a type of savings plan from which you can borrow money. Any unpaid loans that you have taken from your insurance coverage will be deducted from the death benefit received by your beneficiaries.
Term Life vs. Whole Life Insurance: Which is Better?
One type of life insurance is not better than the other. It comes down to your needs, financial situation, age, health, and how you want to protect your beneficiaries after death. Here are some questions to ask when deciding:
- What is my financial situation?
- Do I want something more short-term with lower premium payments to cover the years when I’m paying off the mortgage and raising my children?
- Do I need insurance to cover my funeral? Or debts?
- Do I want to use life insurance to build up cash value for future use?
- Do I want to take out a life insurance policy once and never think about it again?
The term life vs. whole life insurance question is one you might want to take to a qualified financial planner or insurance agent. There are several factors to consider, and you want to be sure you’re doing what’s best for your needs and your family.
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