Differences Between Term and Whole Life Insurance

Differences Between Term and Whole Life Insurance
Differences Between Term and Whole Life Insurance

There’s a common misconception that only parents and those with dependents need life insurance, but realistically, this is a questionable and even outright dangerous viewpoint. Married, single, parent, or senior — everyone should have life insurance. Holding a life insurance policy not only provides financial security for both you and your loved ones in the event of an accident, illness, or injury, it protects your income should you become disabled, too.

Most experts recommend that parents take out life insurance for their children as soon as they’re born. This is especially useful for whole life insurance, which builds and effectively becomes an asset over time. If you don’t already have insurance from a situation like this, you should seek it as soon as you possibly can once you turn 18. Whether term or whole life insurance is best for you as an adult depends on your goals and exactly what forms of support are most important to you.

Term Life Insurance Primer

Term life insurance refers to life insurance policies that span a specific number of years. Typically, they begin the day you take out the policy and end when you turn 65. However, the exact terms used depend almost entirely on the company you partner with. Some brokers sell policies for one year, five years, 10 years, 25 years, 50 years, or 75 years instead.

Comparatively, term life insurance is extremely affordable and budget-friendly. Because a term life insurance policy has an end date, you are much less likely to utilize your insurance or file a claim. The insurance company recognizes this by rewarding you with lower premiums over the life of your policy.

In many cases, you can specify the exact term for your life insurance policy. This is ideal for parents, caregivers, and spouses because it ensures they have a way to replace your income if it’s lost, either to disability or illness, when it matters most. For example, many parents choose term life insurance lasting 20 years to ensure that their children remain covered and protected well into the college years.

If you’re an adult caregiver with an elderly parent who lives with you, term life insurance policies of 20 or 30 years may be best. This range reassures you that, if you were to pass away, money would become available to care for your elderly parent until the end of their natural life.

Overall, term life insurance works best for people who need confidence in their ability to protect and provide for loved ones over a short period of time. Compared side-by-side, it is a budget-friendly option that reduces premiums and makes insurance accessible to people from nearly every income bracket.

Whole Life Insurance Primer

The main difference between term life insurance and whole life insurance is that whole life insurance is permanent, and thus, has no end date. You are covered from the moment you take out your policy until the day you die. If you are injured or incapacitated between these dates, your life insurance policy may replace your income until you can go back to work. If you pass away in an untimely fashion, your whole life insurance policy will provide your loved ones with money to support themselves. Because there’s no end date, your coverage doesn’t expire unless you fail to pay your premiums.

What makes whole life insurance so special is that also qualifies as an investment component and can improve your credit. Your whole life insurance policy has cash value that grows over time with every premium or amount you put into it. It’s tax-deferred, meaning you aren’t taxed for the money your policy produces via interest over the years.

You can also borrow from your whole life insurance policy. In an emergency, you can cash out all or just a portion of your whole life insurance policy to pay for food, a deposit on a house, medical bills, house repairs, or even just everyday necessities to get you through a period of job loss.

Understand that borrowing from a whole life insurance policy works the same as borrowing cash money from the bank. You gain extra financial security temporarily, but you do need to pay the money back with interest over a specific period of time. You can’t just continuously borrow from your insurance policy without paying it back.

Finally, whole life insurance boasts a guaranteed death benefit. This term describes a situation where the beneficiary is guaranteed money if you pass away before your whole life insurance policy begins paying out benefits (usually sometime in seniorhood). Guaranteed death benefit policies protect your beneficiaries by ensuring they receive the original stated amount no matter how much the dollar drops or how the market shifts.