Term Life vs. Whole Life
Know What Life Insurance Coverage Is Right for You
As you go through the transition into full-on adulting, one purchase you’ll inevitably have to make is a life insurance policy. This coverage ensures that if you die unexpectedly, your loved ones will receive much needed money to deal with bills, debt or a lack of income.
Life insurance is pretty straightforward, but there is one important decision you’ll have to consider: term life or whole life (also known as permanent life).
What’s the difference? Term life doesn’t last forever — it’s purchased in a term length of anywhere from 10 to 30 years, and when the term ends, so does your coverage. With whole life, coverage lasts for your entire life. Although whole life may seem obviously better, it does cost a lot more. To decide which type of life insurance is right for you, you should consider if you can afford the cost of whole life insurance.
Can You Afford Whole Life Insurance? If your answer to this question is “no,” term life insurance is probably for you.
Term life insurance is much more affordable than whole life, and it offers the same basic protection, which makes it the right choice most life insurance buyers. Keep in mind, however, that once your policy term is over, your coverage ends, and you receive nothing. Your policy only pays out if you die prematurely.
Ideally choose a term that ends just as your need for life insurance also ends, namely when you’re close to retirement, your children are independent, and your mortgage and other debts are paid off. If you select a term that’s too short, and it ends while you still need coverage, you’ll have to purchase a new term at a much higher rate. The older you are, the more expensive life insurance gets.
Selecting a longer term is almost always smarter, because you lock in the cheaper rates you are more likely to get when you’re a young, healthy person. In addition, term life insurance often can be converted into a whole life policy, if your needs change partway through your term.
If you can afford the costs of whole life insurance, good for you. You’re among the few who may want to consider whole life insurance. Whole life insurance can cost nearly 10 times as much as term life, because it offers benefits that term life doesn’t. For example, whole life insurance offers investment potential and a guaranteed payout.
Instead of putting money into a term life policy that only pays if you pass away during the term, a portion of your whole life premium is placed into an interest-earning, tax-sheltered investment account that you can borrow against or cash out later in life. When retirement rolls around, you’re guaranteed access to a large sum of money that you can use however you see fit, including estate planning. You can even take out loans against your whole life account at almost any time.
Whole life isn’t always a slam dunk, even for those with money to invest, however. Other investments usually offer better returns with lower fees, such as an IRA or your workplace’s 401k — especially if your employer matches your contribution. But, if you’ve maxed out your 401k contribution, and you’re looking for a safe, long-term investment, whole life may be a smart choice to consider.
If you decide to buy whole life insurance, do your research and work with a trustworthy insurance agent who can walk you through this complex insurance coverage.
Shopping for life insurance may not be anyone’s idea of having fun, but it’s an important purchase we all must make at some point. Now that you have an idea of whether you need term life or whole life, at least the process will be that much easier.