Choosing between Term and Whole Life Insurance

Term life insurance is suitable for many people and costs less than whole life insurance, but it has an end date.

term and whole life insurance

Life Insurance Definition

Life insurance coverage is an agreement between an insurance company and the client in which the company guarantees payment of a death benefit to named beneficiaries upon the death of the life insured. The insurance company promises a death benefit in considering the amount of premium by the customer. There are diverse types of life insurance available such as term, whole or universal.

Life insurance coverage prices depend on the age of the insured. Because people that are young can be less probably to die than the senior citizens, people that are young usually pay cheaper life insurance. Similarly, gender is also a price factor, as women generally live longer than men, most of the time they pay lower premiums.

Engaging in risky activities increases insurance costs. For example, a racecar driver faces a high risk of death. As a consequence, they pay more significant life insurance prices, or typically insurance companies deny coverage.

Individual medical history assists in determining insurance rates. Also, your medical history and chronic diseases or other important health problems within your family, such as heart disease, may result in paying higher prices. In addition, obesity, alcohol consumption or smoking can affect people in defining their rate.

So, if you are an applicant, usually you are submitted into a medical exam to determine your overall health, by checking your blood pressure and any other indications of potential health issues that may conclude in premature death for the applicant. People with good health usually pay lower life insurance prices.

What type of life insurance is the one that fits you?

Buying life insurance offers a financial safety net for your surviving dependents. In the event of your death, your loved ones can use the income to cover funeral costs, mortgage payments, college tuition.

There are two particular types of life insurance:

Term life insurance is the simplest to understand and has the lowest prices.

Permanent insurance is more complicated and tends to cost more than term, but it provides additional benefits. Whole life is the most well-known form of permanent life insurance. Other types of permanent life insurance include universal, variable and variable universal.

Understanding term life insurance

Term life insurance offers coverage for a precise period. It’s designed only to protect your dependents in the event of your death during that specific time. If you get a term policy and die inside the term, your beneficiaries receive the payment. After this period has expired, the policy is no longer valued.

You select the term when you purchase the policy. Usual terms are 10, 20 or 30 years. With most plans, the death benefit, and the premium stay the same during the entire term.

When you purchase term life insurance:

  • You select a term that usually corresponds with the years you’ll be paying the bills and want life insurance protection in case you pass away early and can no longer meet these responsibilities.
  • You choose a sum your family would require if you were no longer there to provide for them. The payment could replace your income and help your family pay for the services you provide, such as childcare.

At best, your family’s needs for life insurance will no longer exist by the time the term ends: Your children will be on their own, you’ll have paid off your mortgage, and you’ll have a financial safety net.

Understanding whole life insurance

As with all permanent life insurance policies, whole life offers all-time protection and includes an investment element known as the plan cash value. The cash value grows gradually and is tax-deferred which means you won’t pay taxes on its benefits while they’re amassing.

You can take money out against the account. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you quit the plan, you’ll no longer have protection.

Like all permanent life insurance plans, whole life provides lifelong coverage and includes an investment component.

Even though it’s more expensive than term life insurance, whole life is the simplest form of persistent life insurance. Here’s the reason:

  • The cost remains the same for as long as you live
  • The death benefit is assured
  • The cash value account grows at a secured rate

Several whole life policies can also earn annual benefits such as a portion of the insurer’s financial surplus. You can take the profits in cash, leave them as savings to gain interest, use them to decrease your premium, repay policy loans or buy additional coverage. Benefits are not guaranteed.

Term vs. whole life insurance

Term life is enough for most families who require life insurance, but whole life and other forms of permanent coverage can be helpful in definitive situations.

Choose term life if you:

  • Need life insurance only to replace your income over a specified time, suchlike the years you’re nurturing children.
  • Want the most affordable coverage
  • Think you might wish to permanent life insurance but can’t afford it. Most term life policies are convertible to continuous coverage. The deadline for conversion varies by plan.

Choose whole life if:

  • You need to provide money for your successors to pay estate taxes.
  • Without a life insurance payout, your successors might be coerced to sell off parts of the estate, such as property, to pay the tax bill.
  • You have a lifelong dependent, such as a child with special needs. Life insurance can fund a special requires the trust to provide care for your child after you passed away. Talk with a financial advisor if you need to set up a trust.
  • You want to spend your retirement savings and still leave money for final costs, such as funeral expenses. With a whole life policy, your successors get a payout no matter when you die.
  • You want to equalize legacy. If you design a plan to give a business or other property to one child, you could utilize whole life insurance to compensate your other children.