Although life insurance policies come with many coverage duration and limit options, the most fundamental choice individuals make when purchasing a policy is whether to get term life insurance or permanent life insurance. Both of these are viable forms of life insurance and provide death benefits for covered causes of death, but they differ significantly in their other offered features, coverage duration, and costs.
The most common types of permanent life insurance products are universal life insurance and whole life insurance. In this post, we will compare term life insurance and whole life insurance, which is more popular than universal life insurance.
Both Term and Whole Life Insurance Provide Death Benefits
Most importantly, both term and whole life insurance policies provide death benefits. That’s the main reason people purchase life insurance. Death benefits are the set payouts that a policy’s named beneficiary(ies) receives upon the policyholder’s covered death. In other words, they’re what the beneficiaries listed in a policy will be paid if the policyholder passes away. Beneficiaries are usually loved ones who use the funds to pay off debt, cover living expenses, and pay for additional costs.
Therefore, both term and whole life insurance can guarantee that your loved ones will be taken care of financially after your passing.
However, it might be confusing sometimes to differentiate them and understand whether you should get whole or term life insurance.
Term Life Insurance Provides Death Benefits for a Set Period
Term life insurance policies are characterized by their simplicity and affordability. They normally only provide death benefits coverage, and the coverage lasts for a set term. For example, policies might offer death benefits coverage for 10, 20, or 30 years (or some other duration). After the policy’s termination, coverage ends. (In some cases it can be extended through a convertibility rider).
Since coverage is limited to a set amount of time, insurance companies are able to keep premiums for term life insurance low and stable. Healthy individuals who don’t smoke frequently find term life policies that cost less than their smartphone plan or coffee habit, and even less healthy individuals and smokers often have access to highly affordable policies. Since premiums remain the same throughout a policy’s duration, policyholders have the reassurance that their coverage will stay affordable. means you’re better off getting a term life insurance when you’re young and healthy.
The effectiveness and affordability of term life insurance make it an extremely popular option among individuals who want to make sure their loved ones will be financially looked after. Many people purchase a policy that provides coverage while raising kids or having a mortgage. In many cases, people don’t worry about covering themselves later in life when they have fewer expenses and are no longer supporting their children.
Whole Life Insurance Includes Savings and Life-Long Coverage
In contrast to term life insurance policies, whole life insurance offers lifelong coverage and has an additional savings feature. This makes whole life insurance much more expensive and not necessarily the best match for everyone.
Whole life insurance policies provide lifelong death benefits as long as the premiums are paid. Premiums and coverage typically are fixed over the course of the policyholder’s life.
In addition to the death benefit coverage, whole life policies usually include a savings component, commonly referred to as ‘cash value’. The cash value is designed to grow throughout the duration of the policy, and interest is generated both on a guaranteed basis and (for most policies) via dividends. The cash value will usually grow to become greater than the premiums charged. Therefore, the true cost of a whole life policy is only the cost of opportunity minus the interest earned. In simple terms, since you will usually get all your money back (and then some), the only cost is what you could have earned by using the money in a different way. Additionally, a whole life policy can usually serve as a source of emergency funds, or as a guarantee for a loan.
Whole life insurance policies often make more sense than term, if there’s a loved one who needs to be cared for their entire life even after their primary caretaker passes away. Parents who have a disabled child, for example, might use this type of policy to ensure their child will have the funds necessary to pay for care after they pass. In addition, whole life policies have many tax benefits and are valuable in estate planning scenarios.
Find an Insurance Policy That Meets Your Needs
Don’t worry – you don’t have to make the decision between term or whole life insurance alone. Sproutt’s insurance advisors are available to give you a free consultation and set you up with the insurance policy that fits your individual lifestyle.