Whole vs. Term: Which Type of Life Insurance is Right for You?
A life insurance policy gives you peace of mind that your loved ones will be taken care of after your death. Life insurance policies pay out a death benefit if the policyholder dies while the policy is active (although there are some exceptions). Some policies accumulate value over time.
If you’re considering a life insurance policy, it’s essential to understand your options and the benefits and drawbacks of each type.
2 Main Types of Life Insurance: Whole/Permanent and Term
Whole Life Insurance
Just as the name suggests, whole life insurance lasts for your whole life. As long as you pay your premiums, you will have coverage until your death.
Premiums and the death benefit generally remain the same throughout the policy’s lifetime. Policyholders also receive a guaranteed rate of return on the policy’s cash value.
Whole life insurance is also known as permanent life insurance, and there are a few types:
- Traditional: The premium and death benefit remain the same throughout the policy’s lifetime. These policies also include a savings account, which grows as the insurance company pays out dividends.
- Universal: Provides more flexibility. Policyholders can increase the death benefit provided they pass a medical examination. A cash value account grows at the money market rate. Money generated by the cash value account can be used to cover or reduce premium payments.
- Variable: Provides a death benefit as well as a savings account that can be used to invest in stocks, mutual funds and bonds. Although they may generate value more quickly, variable policies come with greater risk. For example, during economic downturns, the policy’s death benefit and cash value account may decrease.
- Variable Universal: These policies combine the benefits of variable and universal life insurance policies.
Whole life insurance policies offer many benefits, but they do come at a higher cost than other types of life insurance.
Term Life Insurance
Term life insurance lasts for a certain period of time, or term. Typically, policies come in terms of:
- One year
- Five years
- 10 years
- 15 years
- 20 years
- 25 years
- 30 years
A variety of coverage amounts are available, ranging in the millions for some policies.
Premiums are generally based on the policyholder’s age and health condition at the start of the policy. With a level term life insurance policy, the premium remains the same throughout the duration of the policy. However, if the policy is renewable, the rate may change at the start of the new term to reflect the age and health of the policyholder.
With some policies, the insurance company guarantees that the rate will remain the same for the duration of the policy. However, other insurance companies do not offer this guarantee, and the rate may increase during the term of the policy.
Term life insurance is typically the more affordable option compared to a whole life policy. However, your policy may not necessarily last your entire life and will not accumulate value over time. If you outlive the policy, you may not receive a payout.
Some term life insurance policies offer a “return of premium,” which allows the policyholder to recover the premiums they’ve paid through the term of the policy if they outlive the policy.
Understanding your options can help you choose a life insurance policy that meets your needs, goals and budget. Weigh the pros and cons of each type carefully to ensure that your policy will give you the peace of mind that life insurance should provide.