The clock will eventually strike midnight on us all! When it does, you want to leave your family in safe hands. By purchasing life insurance, you secure your loved ones’ future long after you’re gone. Depending on your plan, you also benefit from the insurance policy during your lifetime. However, shopping for life insurance can be confusing — you may be conflicted between “term life” and “whole life” policies.
Whole Life Insurance
Whole life insurance is sometimes called traditional life insurance, and it’s a policy that provides the insured with permanent death coverage. Whole life insurance contains two elements. For starters, your beneficiaries enjoy death benefits in exchange for scheduled premiums. Death benefits are the funds paid to your beneficiaries after your death.
Additionally, whole life insurance offers a saving component called cash value. These accounts grow your savings faster because they’re tax-free and don’t deduct any fees. You could also build your cash value by remitting more than the expected premiums and reinvesting dividends.
Moreover, you can access these savings during emergencies through loans and partial withdrawals. The cash value is particularly useful post-retirement when you can withdraw money from a lower tax group.
Term Life Insurance
This policy offers coverage for a specified period — like 10 years, for example. As such, death benefits can only be paid if the insured dies within the policy’s term. Ordinarily, annual costs are the same each year throughout the policy period. The insured can renew their policy at a higher rate if they outlive their term period.
However, the coverage ends if the insurer doesn’t extend it. In most cases, term life insurance is meant for income replacement. It covers your family’s expenses for several years when you are no longer available to work and make money. For example, your beneficiaries can use the death benefits for living expenses, tuition, mortgage, and debt repayments.
Comparing and Contrasting Whole Life vs. Term Life Insurance
Here’s how term life insurance compares to whole life policies.
Cost
In both cases, insurance costs depend on age, gender, health, family medical history, hobbies, and even credit ratings. However, term life covers are cheaper because of their temporary nature and absence of cash value.
On the flip side, whole life plans have higher premiums owing to their cash value growth. You don’t have to pay back what you withdraw from your cash value. The insurer deducts withdrawal amounts and outstanding loans from death benefits in case you die without settling the debts. Although term life policies start with low payments, premiums multiply with every renewal. This is unlike whole life alternatives that have equal premiums.
Ending the Policy
The need for life insurance may change over the years. With term life plans, you can decide to stop paying premiums since the policy doesn’t include cash value. Though you can halt your payments in whole life insurance, this isn’t the best exit strategy. Insurers might pay the premiums with your cash value until it’s depleted.
You would rather terminate the policy through the right procedure and receive the surrender value. This is the money you get from your insurer when you end the life policy before maturity. The surrender value is usually the surrender charge subtracted from the cash value.
Death Benefits
Both options offer tax-free payouts to your beneficiaries when you die. But while term life plans end when you don’t renew the policy, whole life insurance guarantees long-term coverage provided you remit your premiums.
Note that beneficiaries aren’t eligible for cash value in whole life policies — insurers scrap this amount from the death benefits and leave beneficiaries with what remains. You can only enjoy cash value during your lifetime.
Whole life insurance is ideal if you:
- Intend to leave your beneficiaries with an inheritance
- Can afford high premiums
- Want your policy to generate cash value
- Have people who depend on you entirely
Term life insurance is suitable for those who:
- Cannot afford permanent life insurance at the moment
- Want a cost-effective life insurance option
- Don’t intend to use insurance for investment
- Need life insurance for a specified duration
Remember, you can change from term life policies to whole life. Term life insurance often comes with a conversion option that lets you switch to permanent life insurance plans. Even so, you have to shift within the conversion period.
You could also move from whole life plans to term life. The length of your new term life plan will depend on your cash value savings.
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