In 2020, about 54 percent of Americans have had life insurance of some sort. If you’re among the remaining 46 percent, chances are you may be considering purchasing a life insurance policy soon.
But knowing the right type of life insurance isn’t always easy. For the typical citizen, the entire subject of life insurance can seem complicated.
To help demystify things for you, we’ve developed a comprehensive guide on two of the oldest and most popular types of life insurance: term life insurance and whole life insurance. What are the pros and cons of each? Which of the two is better for your needs?
Read on to learn more.
What Is Term Life Insurance?
As the name implies, term life insurance refers to insurance that offers coverage for a given period of time. Typically, this term ranges anywhere between 10 and 30 years.
Sometimes, term life insurance is also referred to as pure life insurance. That’s because the insurance doesn’t have a cash value component. It only gives your beneficiaries a payout upon your demise during the insurance term.
What Are the Benefits of Term Life Insurance?
Most people who choose term life insurance do so because of its simplicity and finite duration. The term policy also tends to be cheaper compared to other life insurance types. If all you want is a policy that protects your loved ones when you pass away, then term life insurance can give you that.
Many Americans who purchase term life insurance are new parents looking for a policy to last just long enough for their children to finish college and join the workforce.
What Are the Drawbacks of Term Life Insurance?
One of the main cons of term life insurance is that prices can differ depending on various factors. If the mandatory medical exam reveals health complications, for instance, rates could go well over the norm.
Moreover, once the term expires, you’ll have spent all that money for nothing other than peace of mind. Besides, term life insurance doesn’t allow you to use the funds to build wealth.
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance that provides coverage for your entire life, provided you keep paying premiums.
Unlike term insurance, whole life insurance has a cash value component. That means that a percentage of your premium money is invested. The sum grows over time, and since this happens on a tax-deferred basis, you’re not required to pay taxes on the gains.
What Are the Benefits of Whole Life Insurance?
In most cases, these insurance policies are level premium. That means that you’ll be paying the same monthly rate throughout the policy’s duration. This makes it easy to budget for the premiums.
The premiums you pay are split into two, with one portion going to the policy component while the other builds your cash value. Later, you can opt to make a withdrawal or borrow from your cash value to cater for expenses like home repairs or your child’s college tuition. The loans you borrow from your insurance policy are tax-free.
Usually, the annual interest rate is guaranteed. However, some providers sell participating insurance policies. Doing so can provide you with guaranteed dividends, further increasing your total returns.
What Are the Drawbacks of Whole Life Insurance?
Many people tend to forget that the cash value and death benefit aren’t separate features. The reality is every time you borrow from your cash value. Your death benefit reduces by a corresponding amount unless you pay it back. On top of that, your loan attracts interest.
Another drawback is that whole life insurance is a lot more expensive than term insurance. For many people, this relatively high cost can make it difficult to keep up with monthly payments.
That said, you can still get a more affordable policy by comparing whole life insurance quotes from different providers. Choose an insurance agency with a good reputation, and chances are you’ll get the best deals.
Term Vs. Whole Life Insurance: Which Should You Choose?
The ideal life insurance for you ultimately depends on your situation and budget. You can opt for term life insurance if you’re looking for the most affordable policy. Term life insurance is also ideal for consumers looking to replace their income for a specific period, such as during the years they’re raising children.
You can also opt for term life insurance if you intend to get permanent life insurance later in life but can’t afford it now. Many term life insurance policies are convertible.
A whole life insurance policy is perfect if you have a lifelong dependent. For instance, if you have a child living with a disability, whole life insurance can fund a trust that provides care for them after you pass away.
A whale life policy is also suitable for you if you’d like to provide funds for your heirs to pay estate or inheritance taxes.
You could also opt for this policy if you wish to spend your retirement savings and still leave your children an inheritance.
A whole life insurance policy is also an excellent way to equalize inheritances. For instance, you may want to leave your business to one heir. Your whole life policy can then compensate the rest of your heirs.
Get the Right Type of Life Insurance for You
Both term and whole life insurance provide death benefits to your loved ones, but the two have important differences. Knowing these differences is the best way to know which of the two can suit your needs best.
Are you interested in purchasing a life insurance policy with the best rates? Please, contact us today to learn how we can help.