The difference between term life vs whole life insurance can be a bit confusing and not very intuitive for people who are not experienced in the world of insurance. Especially when it comes to such an important financial decision, you should definitely familiarize yourself with the different types of life insurance so you can be confident you are actually getting the coverage you need.
Understanding Term Life Insurance
The most common type of policy is called term life insurance. This type of policy covers a specific length of time, usually for either 10, 15, 20 or 30 years. The reason why you would want this type of coverage is if you want to ensure you leave behind some financial stability in the unfortunate event of your death. For example, if you recently had a new child, you may want to take out a policy for say, 20 years on yourself. Should anything happen to you in that 20 years before your new child reaches adulthood, you know that that you are leaving behind some financial security for them with what is called the death benefit, or the money that is paid out when you die during the covered time period.
Advantages and Disadvantages for Term
Term life insurance is much cheaper than whole life coverage, so that immediately makes it an appealing option for people on a budget who still want the security blanket that life insurance can provide. However, once the length of the coverage has expired, you usually do not get any of the premiums you paid back. Once the time period specified in the term policy is over, you may be able to renew or extend the coverage, depending on several factors and circumstances, but it will most likely come with a higher premium price.
Why Term Might Be Right for You
- You need a more affordable option
- Your need is specific to a certain period of time
- Able to cancel at any time
- Easiest life insurance to understand
How Whole Life Insurance is Different
Whole life differs from term life in several key areas. Rather than covering a specific period of time, whole life is a type of permanent insurance. Rather than starting out cheap and becoming more expensive as life goes on the way that term policies do, whole life can be the same flat premium for the entire length of the policy. This means that while the prices will be much more expensive when you first start the policy and are younger, but on the other hand, when you are much older the premium on the whole policy will be much cheaper than what you could get at the same age going with a term policy.
Pros and Cons of Whole Life
Whole life is much more expensive than term, on average it can be as much as 6 - 10 times more costly. For that much more money, whole life does provide some benefits that term does not. For example, a whole life policy actually accumulates a cash value over its lifespan. You can even withdraw or borrow against that cash value. In order to qualify for a whole life policy, many insurance agencies will require a health exam. It is sometimes possible to get whole life insurance without a medical exam, but in general you can expect the premiums to be more expensive.
Reasons to Choose a Whole Policy
- Covered for life
- Acquires a cash value
- Can have lower premium prices at older ages
Comparing Whole and Term Life Insurance Policies at a Glance
|Policy Benefit||Term Life Insurance||Whole Life Insurance|
|Premium Cost Stays Consistent||X|
|Gains a Cash Value||X|
|Guaranteed Death Benefit||X||X|