Both term life insurance and whole life insurance are basic forms of life insurance that provide protection in the form of a death benefit for their beneficiaries.
The differences between the types mean that one may be more appropriate for your situation than another.
The debate between term life insurance versus a whole life insurance policy is not new, and for good reason.
Both have their pros and cons that can guide your final decision. They also offer the opportunity to supplement your long-term savings.
Let’s take a look at how you can decide which one is right for you and your family.
Term Life vs. Whole Life Insurance: Which Is Better ?: THE BIG DEBATE
Before we get into the differences, let’s talk about why you should get life insurance in the first place. And unless you live in isolation, your passing will affect other people, even financially.
Think of your spouse and children who depend on the salary you bring home. Sure, it’s about monthly bills and expenses, but also a lot more.
Life insurance means that your family will not suffer the additional burden of financial problems if you die. There may be unexpected medical costs and burial expenses . In the future, these may also include more serious obligations, such as a mortgage or business debt.
Unfortunately, these costs don’t go away when you die. They go to his family and add to his problems.
However, not everyone needs life insurance.
If you are single, for example, it may not be necessary for you to invest without dependents. If your family is financially independent, life insurance may not offer any benefits. In some cases, you can find a more appropriate type for you and your family.
LIFE INSURANCE BENEFITS
Life insurance acts as a safety net to keep your family afloat despite the loss of your income. In fact, this is one of the main reasons why people choose to get life insurance.
The death benefit they receive can keep them living the lifestyle they are used to. It’s not just about the money. It also gives them peace of mind and makes their transition easier.
You can also consider a life insurance policy to guarantee the financing of your children’s future. These funds can cover education or other expenses.
Similarly, you can view life insurance as a way to solve problems with your business . You may also have a favorite charity that you want to honor with a gift . A life insurance policy gives you this opportunity.
WHAT IS TERM LIFE INSURANCE?
A term life insurance policy is the simpler of the two types. It is also the most affordable.
As the name implies, it covers you for a set period ranging from 1 to 30 years . Provides a death benefit to your beneficiaries based on the face value of the policy. It offers several benefits that make it worth considering as a temporary solution to cover the financial risks of your death.
PROS AND CONS OF TERM LIFE INSURANCE
Cost savings, of course, stand out as a clear benefit.
This savings has long-term benefits because your premium will stay the same for the duration of the initial policy, depending on the terms of the policy. As long as you make payments, your insurance company cannot cancel it. It is a cost effective way to protect your family.
Most policies will automatically renew, offering coverage up to age 90 or older. However, your premiums may increase with each new term beyond the initial planned duration.
This is why a 30-year term life insurance policy makes sense for a younger individual. You can get a favorable rate as the premiums are generally lower for young people than for seniors.
There is some flexibility with term life insurance so you can better tailor a policy to your needs.
You can opt for one that is renewed annually for situations where you need a temporary fix. The advantage is that it will fail to prove that it is insurable, but at the cost of higher premiums.
You may also have the opportunity to exchange it for a whole life insurance policy.
WHAT IS WHOLE LIFE INSURANCE?
Whole life insurance takes the basic premise of a term life insurance policy several steps further.
Unlike a term policy, whole life insurance covers you for your entire life, as long as you live. Provides a death benefit to your family, similar to term life insurance. It differs in one key respect.
In addition to this benefit, there is also a living component regarding your cash value.
PROS AND CONS OF WHOLE LIFE INSURANCE
The cash value of whole life insurance comes with both advantages and disadvantages.
On the positive side, a portion of your premium goes to the savings portion. It carries many of the benefits associated with a 401 (k) or IRA. It accrues interest, albeit at a small rate. However, it is tax-deferred and unlimited. The cash value also has other advantages.
You can withdraw from this portion or take a loan against it. Both are tax-free as long as you stay below your base.
Otherwise, you will pay income tax on this part. You do not have to repay a loan.
However, the amount will be deducted from the death benefit, something to keep in mind.
Now the bad news.
The premiums for a whole life insurance policy are much higher than term life insurance because you are paying the cash value and permanent death benefit.
And the insurer doesn’t pay for it after your death.
However, you can also use its cash value to pay your premiums, giving you a little more flexibility. You can make the cash value of your policy work for you.
CHARACTERISTICS OF BOTH TYPES OF INSURANCE
There are several common characteristics between the two types of insurance.
- They both pay a death benefit that is generally tax-free, a benefit for your family.
- Each has a guaranteed premium window for its duration, depending on your plan and its renewability. You can avoid unpleasant surprises with skyrocketing rates or you need to prove your insurability.
- Both provide the security of protection for your family as long as you make your payments.
- With long-term and lifetime policies, you also have the advantage of guaranteed coverage.
You also have the flexibility to match your life insurance needs with your long-term savings, when necessary. Using the cost of a whole life insurance policy as a basis, you can allocate funds to provide you with the best service.
GET THE BEST OF BOTH WORLDS
If you want to add savings to your long-term plan, you have two options.
- You can get a whole life insurance policy, including this component. The interest may not be high, but you won’t lose money on your investment. It offers an excellent secure option for both purposes, with the flexibility of tax-free withdrawals or loans.
- Your other option is to purchase a term life insurance for couples policy. Instead of an insurance company managing your money, you can take responsibility yourself. You can put the extra money you would pay into a whole life insurance policy and put those funds in a mutual fund or other type of investment. You have the security of a death benefit and the opportunity to earn more.
The clear advantage of term life and whole life insurance is its simplicity. You know what to expect from your life insurance policy. Each offers the opportunity to increase your savings.
You can rely on the cash value of whole life insurance or the investment you make in conjunction with term life insurance.
With either, you have the flexibility to look after your family’s financial security.