The two main types of life insurance are term life and whole life, and the price difference between these policies can be hundreds of dollars per year. Understanding who these policies are most suitable for as well as the benefits can help you make the best decisions for your future.
Why Is Life Insurance Important?
Life insurance gives you peace of mind that, in the event of your death, your funeral and other associated expenses will be covered, and your loved ones will be taken care of.
Few people like thinking about their own mortality, but it’s important to consider what kind of life insurance is a good fit for you. It protects against an unknown future, and can make life easier for bereaved loved ones during a challenging time.
Many employers take out group accidental death and dismemberment policies for those in high-risk jobs, but it’s important to remember that these policies only cover workplace-related incidents. Maintaining additional, broader coverage for day-to-day life is wise, too.
Differences between Term and Whole Life Insurance
The difference between term and whole life insurance lies in the period the policy covers. Term life insurance is a fixed-term policy that lasts for a predefined period of time — usually 10, 20 or 30 years. Whole life insurance runs for an indefinite period.
If a person dies during their term life insurance validity period, the policy pays out. If the policyholder outlives the term, the coverage comes to an end.
Whole life insurance remains active for as long as the person is contributing to it. In addition to being a life insurance policy, it also serves as a fund that can be accessed during retirement.
Whole life insurance can be several hundred dollars per month more expensive than term life insurance, with policyholders paying extra for the privilege of long term yet flexible coverage.
Why Choose Term Life Insurance?
The main reason to choose term life insurance is that it is far more affordable. Fees for a term life policy are much lower than fees for a similar value life insurance policy, making them a good option for those who don’t want to commit to high monthly premiums.
Term life insurance makes sense if you are at a high-risk job and are required to have a life insurance policy to take out a mortgage, or you simply want to make sure that your debts are paid out in the event of your death, and the future of your spouse and children is protected.
The main benefits of term life insurance are:
- Lower monthly costs
- Fixed payout amounts that are similar to those of whole life policies
- Premium typically stays the same for the duration of the term
- Flexible terms
The drawback of term life insurance is that the policyholder needs to look for another policy once the term ends.
It’s easy to find affordable life insurance as a healthy 30-year-old, but if someone takes out a 30-year policy at that age, they’ll find themselves shopping for a new policy at age 60. Finding an affordable policy at age 60, especially if they have any risk factors, might be difficult, and an affordable policy that pays out the amount they’d like to leave behind for their loved ones could be even harder.
Why Choose Whole Life Insurance?
Whole life insurance is a more costly form of coverage because it does not expire. You can start contributing at any age, and if you need to borrow some money at a later date, you can borrow against the policy. For smaller amounts, you may be able to make a simple cash withdrawal.
You can tap into the policy’s cash value for major life events or as a part of a retirement plan. In addition, since the policy never expires, you can feel confident that the money you’re paying into the policy is building value for you and those left behind after you pass.
Whole life insurance is a major commitment, but it makes sense for those who want stability. Benefits of whole life insurance policies include:
- Fixed premiums, which mean the policy should feel less expensive over time due to inflation
- A guaranteed death benefit
- The cash value of the policy grows at a steady rate (although likely lower interest than other investment options)
Some whole life insurers offer dividends. These are paid out of the insurer’s profits, and you have the option of taking the dividend in cash or putting it back into the policy. Dividends are not guaranteed, and not all insurers offer them, but when they are available, they can be a nice bonus.
Is Your Life Insurance Coverage Enough?
According to a 2018 survey, one in five adults with life insurance says their coverage is not high enough.
It can be tempting for people who are taking out whole life policies to take out a smaller policy than they need to keep the premium low. This could backfire, because while it is possible to alter your premium later, the cost of buying a $250,000 policy at age 40 would most likely be higher than buying the same policy at age 30.
Whole life policies are most effective when low rates are locked in early.
The same applies for term life. A young person may wish to buy a short-term policy because their employer or mortgage lender requires them to do so. For a young person with no dependents, a cheap policy may be a good idea. Once a person starts a family, it becomes more important to choose a policy that takes those circumstances into account.
Choosing the Best Life Insurance Policy
If you’re not sure which policy is best for your needs, consider these questions:
- Do you want a policy that builds cash value?
- Do you want to leave money behind for your family?
If the answer to either of those questions is yes, whole life insurance could be the better option for you, assuming that it fits your budgetary needs.
It’s important to be realistic about the costs, though. A term life policy for a relatively healthy young person could cost less than $20 a month. That policy could be more than adequate to cover the holder’s debts and funeral costs if they were to die in an accident during the term.
A similar value whole life policy may cost over $200 per month. That’s a huge commitment for a young person to make when they cannot access the cash value for many decades.
Whole life insurance is a safe way of saving money for the future, but for low- and moderate-income families, there are other options, such as IRAs, that could offer higher returns, and it’s worth checking into those options first.
There’s another form of life insurance that rarely gets discussed called final expense. This type of policy features guaranteed acceptance, has very low premiums and pays out a small death benefit that can be used to cover funeral expenses. This is a useful option for people who have limited savings and want to make sure their loved ones are not left with out-of-pocket expenses in the event of their death.
If you’re unsure which life insurance policy suits you, look at our tool to compare life insurance plans. With a few simple questions, you can find the plan that best suits your needs.