Whole Life vs. Term Life: Which Type of Insurance Is Right for You?
Shopping for life insurance can be confusing if you haven’t purchased it before. This can be especially true when comparing the differences between term and whole life insurance.
But understanding these differences is crucial to picking a life insurance policy that’s right for you and your family. Knowing the pros and cons of each will help you make an informed choice and protect what matters most.
Why do you need term or whole life insurance?
Before you decide whether you should buy term or whole life insurance, first determine your needs and what you want the insurance to do. Are you looking for an insurance policy that protects you and your family from a life event, such as the loss of income from your death, or are you looking for more comprehensive protection?
Answering this question is important because the coverage amount for term and whole life policies can vary greatly based on several factors, such as the policy’s cost and qualification requirements.
If you are looking for something to help cover your final expenses, a specific type of whole life insurance called final expense insurance (also known as “burial insurance” or “funeral insurance”) may be best depending on your age. But if you’re looking to protect your family from a loss of income, a term policy may be better suited.
Your circumstances and needs will determine which type of life insurance is right for you.
How does term life insurance work?
Term insurance covers a fixed span of time – or “term” – and is generally considered temporary insurance. The term can be as little as one year and can be scaled from there depending on the provider. The average span of a term life insurance policy is between 10 and 20 years, but the term can also cover someone until they reach a specified age.
These policies generally pay the death benefit if you pass during the term of the policy. If the term of the policy ends before you pass, then the policy typically expires and no death benefit is paid. Fortunately, there are types of term insurance that are more flexible, such as:
- Renewable term – this typically allows the policy to be renewed for a set period of time when the policy expires
- Convertible term – this typically allows you to convert the insurance to a different plan
To qualify for term life insurance, you may have to take a medical exam because of how high the coverage amounts are. Because this type of insurance is straightforward and doesn’t accumulate cash value, the cost is relatively low (depending on your age and overall health) compared to whole life insurance.
For the most part, term premiums are lower than whole life premiums because the coverage is for a specific period of time. The premium of a term life policy depends on several factors, including whether you are a smoker or non-smoker, your age, and any pre-existing health conditions you have.
How does whole life insurance work?
Sometimes called permanent insurance, a whole life insurance policy provides coverage for your entire life as long as premiums are paid. This type of insurance can develop what’s called “cash value” which is the money that builds up in the policy as premiums are paid. Depending on the provider, a policy’s cash value may be withdrawn in the form of a policy loan or may be applied towards the policy’s premium. Any unpaid policy loans are typically subtracted from the death benefit.
A whole life insurance policy provides death benefits that are payable to the primary beneficiary at the time of your death. Unlike term insurance, whole life policies provide coverage for your entire life. As long as premiums are paid, the policy stays in force until you pass.
Another advantage of whole life insurance is its policy premiums are usually locked in for the life of the policy. This means the policy’s premium will remain the same even as you age. This is important because life insurance typically costs more as you get older and can be difficult to qualify for. Locking in an affordable premium early on can make a huge difference.
If you have health problems, it may be easier to qualify for whole life insurance depending on the amount of coverage you’re looking for. Because the coverage amount is usually smaller for whole life policies, some don’t require a medical exam to qualify. Depending on the provider, you may be able to qualify just by answering health questions on the application.
Life insurance isn’t a one-size-fits-all solution. If you still have questions about which type of life insurance is right for you, check out some of our articles listed below.