Term Life vs Whole Life Insurance: Which One to Buy?

James Battiston
by James Battiston November 9, 2018 / No Comments

Having to consider your own mortality is a sensitive subject. It’s made even more complicated when you consider the financial well-being of your dependents.  Luckily, there’s life insurance, which provides you with the assurance that upon your passing, your family and dependents will be taken care of.

When it comes to life insurance, there are many options available. The two most common types of life insurance are term life insurance and whole (or permanent) life insurance.  But what kind is right for you? When looking for life insurance quotes, it’s helpful to understand what each type offers, and what the cost to you will be.

What Is Term Life Insurance?

 Term life insurance is coverage that is provided to you for a specific period of time or term.  Whether it’s ten, twenty, or thirty years, during the term, the costs will remain the same, although these may change when it’s time to renew the policy. A benefit of term life insurance is that most policies allow you to convert to permanent, or whole life, insurance but changes to your health, job, or lifestyle may affect your premiums.

In general, term life insurance is an excellent option if you are looking for an affordable policy that provides temporary protection.  For example, a colleague recently purchased Term Life Insurance for himself when his wife went back to school. If anything were to happen to him, he wanted to ensure that her education and expenses were covered until she re-entered the workforce.  It is also a good option if you are a business owner who is looking for key person protection – or insurance coverage for individuals that play an invaluable role in a company. With businesses experiencing turnovers in staff and unpredictable longevity, it’s a safe way to get coverage while not making long-term commitments.

While term life insurance is a more affordable option than whole life insurance, it’s important to reiterate that term policies are only valid for a limited amount of time.  Term life insurance can be looked upon as an option if you are looking to create replacement income for your dependents in case of death, as it provides a tax-free payment to your beneficiary. If, on the other hand, you want to ensure that you’re covered for your entire life, and to make sure that your family will have the money needed to cover your funeral and any outstanding financial debts, you might want to consider Whole Life Insurance.

What is Whole Life Insurance?

Whole life insurance, or permanent life insurance, is coverage for an entire lifetime, paid out upon your death.  Most whole life policies require you to pay annual premiums, but these premiums are usually at a fixed rate regardless of your health.  Some whole life insurance policies allow you to pay the premium for a certain period (for instance, 20 years), and never have to pay again after that time.

If you are looking for a life insurance policy that will be beneficial for estate planning, or if you are planning on making a significant charitable donation upon your death, then whole life insurance may be for you.  With the policy being guaranteed until the time of your death – not just for a term – whole life insurance provides assurance that your dependents will have financial security at the time of your death.

So Which Insurance Is Right For You?

When thinking about life insurance, you have to consider both your present financial situation and the long-term benefits of the policy. As with any decision, it’s important to look at the options available to you and to consider what is best for your given situation.  Term life insurance tends to be a good option for young families who require temporary protection while paying off mortgages and saving for the future.  Because it is initially more affordable than whole life insurance, term life policies allow individuals to maximize their financial savings while still having protection. If you choose a term life insurance policy, you need to be aware that, should you want to renew your policy at the end of the term, the cost of renewal can be substantially higher than when you first signed up for it. This is due, in part, to the fact that it is generally more costly to insure older individuals than it is younger ones.

Whole life insurance is an investment for life where premiums build cash value, or that can add to the death benefit payout. With most policies offering a guaranteed cost for life, you may find yourself paying more up front, but in the long term, you will see cost savings and efficiencies.  For instance, unlike term life insurance, whole life policies can provide individuals with tax-free income through leveraging. This works by borrowing money against your own policy, which will need to be paid back with interest, but usually at a much lower rate than bank loans or credit cards. These policies could be substantially more expensive on a month-to-month basis initially, but you will also know that the premium will most likely remain unchanged for your lifetime.

By considering your present financial needs and long-term goals, and by comparing the term life insurance and whole life insurance policies that are available, you’ll be able to make an informed decision about what type of life insurance is right for you.  Planning for your financial needs and those of your dependents after your death is painful, but the right insurance policy can help ensure a positive future for your loved ones.