When it comes to life insurance, there are two main types: whole life and term life insurance. While both life insurance types offer benefits to the policyholder, whole life is often the better option for consumers. Understanding the differences can help you make the right choice for yourself and your family.
Explore why whole life insurance is better than term life insurance and what factors you need to weigh when deciding on your family’s best interest.
Who Needs Life Insurance?
Many people believe that life insurance is only for breadwinners or people with young children. However, there are several reasons why everyone should consider carrying life insurance.
Life insurance can provide financial security for your loved ones when you pass away. Because life insurance policies accumulate cash value over time, they can be used as a source of emergency funding if you become sick or injured and cannot work. You can also use life insurance as a tool for estate planning, helping to ensure that your assets are distributed according to your wishes.
What Is a Death Benefit?
A death benefit is a specified amount of money paid to the beneficiary of a life insurance policy upon the policyholder’s death. The beneficiary can be any individual or entity the policyholder designates, such as a spouse, child, parent, or friend.
The beneficiary can use a death benefit to cover funeral and burial costs, outstanding debts, and other expenses. In some cases, the death benefit can protect your family financially after your death by providing them with funds to supplement their income as they adjust to a new financial or living situation.
Death benefits are typically tax-free, which can further ease the burden on those who have lost a loved one.
What Is Term Life Insurance?
Term life insurance is a type of life insurance that provides coverage for a set time, typically 10, 15, or 20 years. If the policyholder dies during the policy’s term, the death benefit is paid to the beneficiaries. If the policyholder remains alive for the policy’s term, it will expire, and no benefits will be paid.
What Are the Pros and Cons of Term Life Insurance?
Term life insurance is generally less expensive than permanent and other types of life insurance. However, it does not build up cash value, and it does not provide coverage for your entire life.
If you choose a level-term policy, your death benefit remains unchanged throughout the life of the plan. This structure means your beneficiaries receive the same cash amount regardless of when you pass away.
Additionally, term life insurance policies tend to be more flexible than other policies, allowing policyholders to tailor their coverage to their unique needs and budget.
However, there are also some disadvantages to term life insurance. In addition to not building cash value, many term life insurance policies have strict eligibility requirements, making it difficult for some people to qualify for coverage.
What Is Whole Life Insurance?
Whole life insurance, which most people know as traditional life insurance, is a type of permanent life insurance that offers death benefits and cash value accumulation. Premiums are higher than term life insurance, but the policy remains in force for the insured’s entire lifetime as long as premium payments are up to date.
The cash value accumulation feature allows the policyholder to borrow against the policy or surrender it for its cash value. Whole life insurance is not suitable for everyone, but it can be a good choice for people who want the death benefit and the potential cash value growth.
What Are the Pros and Cons of Whole Life Insurance?
The level of certainty that comes with a policy that covers you for your entire life makes whole life insurance an appealing option for most consumers. Some of the benefits of whole life insurance include:
- Guaranteed death benefit
- Level premiums
- Ability to access cash value through loans or withdrawals
However, whole life insurance also has some drawbacks, such as high costs and a lack of flexibility, meaning you have little ability to change any part of the policy.
Other Life Insurance Options
Besides whole life and term life insurance, there are other options to consider when selecting a plan.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance that offers flexibility in both the death benefit and premium payments. Unlike whole life insurance, which pays out a fixed death benefit, universal life insurance allows policyholders to adjust their death benefit as their needs change over time.
In addition, universal life insurance features flexible premium payments, allowing policyholders to make larger or smaller payments depending on their financial situation. Universal life insurance policies also accumulate cash value over time, which can be used to cover the cost of the policy or borrowed against in case of financial need.
Indexed Universal Life Insurance
Indexed universal life insurance is a type of permanent life insurance that offers death benefit protection and the opportunity to accumulate cash value. The cash value of an indexed universal life policy grows based on the performance of an underlying stock market index, such as the S&P 500.
Indexed universal life policies offer flexibility in how consumers pay premiums and how the cash value is accessed. Policyholders can choose to make lump sum payments or pay premiums monthly, annually, or even once in a lifetime.
Unlike traditional whole life insurance, indexed universal life policyholders can take loans or withdrawals from their policy without surrendering the policy or impacting the death benefit payout. However, it’s important to note that taking loans or withdrawals will reduce the cash value and death benefit.
Variable Life Insurance
Variable life insurance is permanent life insurance offering policyholders the ability to invest their premiums in various sub-accounts. This approach differentiates it from traditional whole life insurance, which invests premiums in a single, fixed account.
The performance of the investments in the policyholder’s sub-accounts determines the death benefit paid to beneficiaries when the policyholder passes away. Because of this, variable life insurance policies tend to be more expensive than other types of life insurance. However, they also offer policyholders the potential to earn a higher return on their investment.
How to Choose the Best Life Insurance Policy for Your Needs
Remembering a few key factors can help you make the best decision for your needs.
- Consider how much coverage you need. Base your coverage amount on your age, health, and financial obligations.
- Determine the length of time you need the policy to remain in effect. Some policies only cover a set number of years, while others last until you reach a certain age.
- Compare features and costs of different plans before making a final decision. Opt for a plan that meets your coverage needs and that you can afford the premiums for in the long term.
Why Whole Life Insurance Is Better Than Term Life Insurance
While term life and whole life insurance have their benefits, whole life insurance is often the better option. Whole life insurance provides lifelong coverage, whereas term life insurance only covers you for a set period. Under a term life insurance policy, your beneficiaries will not receive a death benefit if you die after your term life policy expires.
Whole life insurance builds cash value over time, which you can borrow against or cash in if you need money in an emergency. Term life insurance does not offer this benefit.
Whole life insurance is often the better choice for those who want comprehensive coverage and the peace of mind that comes with knowing their loved ones will be taken care of financially if they die.
Choosing the Life Insurance Product for Your Needs
Weighing your long-term goals along with your beneficiaries’ needs will help you find the type of life insurance that fits your profile. After you decide on a life insurance company that offers the best terms, a medical exam will help the provider determine your risk and your premium payment.
Once your policy is in effect, you can have peace of mind knowing your family’s financial future is secured.
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Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.