Life insurance can be quite complicated because of the different products out there. Nevertheless, when you are considering which type of life insurance is best for you, it’s important to understand the basics, benefits, and realities to see what works for you.
Life insurance products are designed to protect people financially. They guarantee a specific amount of money to replace the financial loss suffered by a family member.
Only life insurance can guarantee the money a family needs for continued security when it needs it the most. That is the most important job of life insurance. It provides a new source of cash and income so a surviving family can continue to live in comfort after the death of its primary income earner.
So, what is the difference between term vs whole life?
A term life insurance policy is exactly what the name implies: It is a policy that provides coverage for a specific term or period of time, often 10, 15, 20, 25, 30, 35, or even 40 years.
After that, you can usually continue the policy on a year-to-year basis up to age 95, which is the term life insurance age limit, but at a much higher cost. Term policies are sometimes called “pure life insurance” because, unlike whole life insurance, there is no cash value component to the policy.
You pay your premiums as scheduled and in return, your insurer agrees to pay a death benefit should you die within that term. Term life premiums are based on a person’s age, health, and life expectancy.
A major benefit of term life insurance is the low initial cost. Term insurance can be purchased in large amounts for relatively small premiums. Most term policies can be converted (age limitations typically apply) to a whole life policy if your temporary needs evolve into lifetime needs.
The disadvantage of term life insurance is that the policy is temporary. Term insurance is designed to last for a specific amount of time (the term).
After the term period is over, many policies are guaranteed to renew on an annual basis at a higher premium and may become unaffordable.
Whole life difference
Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who does not want any guesswork after buying life insurance.
Whole life insurance combines an investment account called “cash value” and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policy’s death benefit when you pass away.
Unlike term, it is not a “pure life insurance” product because it includes a cash value component. A policy has cash value when a portion of your premium dollars are invested and this sum grows over time on a tax-deferred basis, that is, and you don’t pay taxes on the gains.
The benefits of whole life insurance is that the costs are guaranteed to stay the same. The premiums you pay the insurance company each month will never go up.
It’s a fixed benefit for your beneficiaries to receive when you are no longer here. Cash value grows on a tax-deferred basis and your heirs will receive tax-free assets. Some insurance policies offer dividends as well.
The disadvantage of whole life insurance is you will pay higher initial premiums compared to term life insurance.