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When you buy term insurance, you have several options—understanding the different life insurance policies and how they can help you decide which is best for you.
Let’s take a closer look at term life insurance vs. whole life insurance and how they differ. While both types offer financial protection in the event of death, there are some essential differences between them. How you intend to use this coverage will likely affect which one works best for you. We’ll explain each policy’s pros, cons, and usage so you can choose wisely when it comes time to get coverage.
What Is Term Insurance?
Term life insurance is a type of coverage that provides a death benefit to your loved ones if you die while the policy is active. Your amount typically depends on your age, health, and policy length.
Term life insurance is most commonly used as a source of quick coverage that you can get for a short period. You can purchase a term policy for as little as a year or as long as your entire lifetime. While you don’t have to get a physical exam to qualify, you will have to take a medical questionnaire to determine your coverage level.
Learn more on Whole Life Insurance
Whole life insurance is a type of permanent life insurance. It’s designed to be in effect for the rest of your life, although you can also choose to cash it in early if you want. Whole life insurance combines three different types of insurance – term, endowment, and cash value. Endowment life insurance has a set rate that stays the same for the policy’s life. Cash value life insurance builds up a savings account that you can use to help pay the premiums. Whole life insurance is typically more expensive than term life insurance. You’ll likely have to take a physical exam to qualify for coverage. Premiums increase as you get older, which is a factor that affects your decision.
How Are Term Life And Whole Life Insurance Different?
While both policies offer death benefits and protection for your loved ones, they work differently.
Here are the main differences between term and whole life insurance:
Term Life vs. Whole Life Premiums
Term insurance premiums are typically lower than those of whole life insurance. They’ll remain the same for the entire life of the policy. Over time, costs for whole life insurance will increase.
Term Life vs. Whole Life Death Benefits
The death benefit is the amount your beneficiaries will receive if you pass away on the active policy. The amount is typically higher for term life vs. whole life. You can also receive the full amount for the term life policy earlier than the whole life policy.
Policy Ownership
If you own the whole life policy, it will be transferred to your beneficiaries when you pass away. If you own the term life policy, it will end when it expires. Term insurance is also less expensive than whole life.
Why You May Want Term Life Insurance Over Whole Life Insurance?
There are some reasons why you may want to choose term insurance over whole life insurance. Here are a few:
- Flexibility – Term life insurance can be bought and canceled anytime. While whole life insurance is a more permanent option, you can still cash it in after a certain period. You may want to do this if you can no longer make payments.
- Affordability – Still, they are often much less than the cost of whole life insurance. If you’re in good health and young, you may find that term life is a much more affordable option.
- Coverage Amount – You can adjust the death benefit amount of a term life policy. You can’t change the amount of coverage on a whole life policy after you get it. You may want to select a lower amount with term life, so your loved ones aren’t left with too much debt if you pass away early.
- No Savings Account – With whole life insurance, money is taken out of your policy to help pay the premiums. Term insurance doesn’t do this, so your death benefits won’t be reduced.
Why You May Want Whole Life Over Term Life Insurance?
There are some reasons why you may want to choose a whole life insurance policy over a term life policy. Here are a few of them:
- Coverage Amount – The number of death benefits for whole life insurance is typically higher than for term life. Your beneficiaries will receive more if you pass away during the active policy.
- No Medical Exam – You don’t have to pass a medical exam to get a term life policy. A whole life policy requires a physical exam to be approved. If you have a serious medical condition, you may find that term life isn’t an option.
- Guaranteed Coverage Amount – Your death benefits increase as you age, which occurs with term life. The death benefits on a whole life insurance policy remain the same throughout the policy’s term.
- More Options – Whole life insurance comes in many varieties and options. You can select a policy that meets your needs and is best for your financial situation. Term life is limited to one type of policy.
Bottom line
Choosing the right type of life insurance isn’t an easy decision. Depending on your needs and financial situation, you may decide that term insurance or whole life insurance is best.
There are many factors to consider, including cost, coverage amount, and how you intend to use the policy. Your health, age, and finances will determine the best type for you.
There are many differences between term and whole life insurance, including premiums, coverage amounts, and policy ownership. There are also other types of policies you can choose from, depending on your needs. When it comes time to buy life insurance, it’s essential to understand the different types and find the one that is right for you.
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