When you buy a life insurance policy, one of the first decisions you’ll have to make will be whether to purchase term life insurance or whole life insurance. Both options will provide financial protection to your loved ones, but they are quite different in terms of coverage period, cost, and features. Understanding the differences between term and whole life insurance will help you determine which option suits your financial goals and needs.
Term life insurance is a simple, inexpensive choice that pays your beneficiaries a death benefit while you are alive. If you die during the term, they get the money. If not, the coverage expires, and you receive nothing. Term life lasts a specific amount of time, usually between 10 to 30 years, and it provides coverage only for that period. It makes sense for people who need temporary coverage – for example, parents with small children, a mortgage or other debt obligations that will lessen over time. Because term life policies are written to expire after a specific period, they are much, much less expensive than permanent life insurance products.
By contrast, whole life insurance is a type of permanent insurance that provides coverage for your entire life, provided you continue paying premiums. The distinguishing feature of whole life insurance is that it offers life coverage for as long as you live, coupled with a savings feature called cash value that grows over time. You can borrow against the cash value or tap it for other financial goals, which is one of the reasons whole life insurance is often referred to as a ‘permanent financial solution’. Not surprisingly, whole life insurance premiums are much higher than those for term life insurance because they provide added benefits in the form of lifelong coverage.
One big selling point for whole life is the certainty of payout. Term policies pay a death benefit only if you die while the policy is active, which means if you die after your terms are up, your beneficiaries get nothing. Not so with whole life, which guarantees your beneficiaries a payout no matter when you die. It’s a good way to make sure your financial obligations – say, long-term care or student loans for your children – are paid off.
Ultimately, though, this is a trade-off between cost and long-term goals. If you’re looking for cheap, temporary coverage you can adjust as your needs change, term may be the way to go. But if you want permanent coverage, the cash value component, and the ability to make a lasting financial gift for your children and grandchildren, then whole life insurance may be the right solution for your family.
