Searching for the right life insurance for you can be overwhelming. You will come across terms life and insurance and whole life insurance as you’re searching. Although the names may seem like common sense, term life insurance lasts for a specific term, and whole life insurance lasts your whole life, but there are more differences between the two types of insurance.
Both types of insurance offer different benefits and are ideal for different people. This article will discuss what types of coverage are included in the two types of insurance to understand what you ask your insurance advisor and what to look for when you decide which type of insurance coverage will be the best for you.
>>MORE: Why Is Life Insurance Important? (Top Important Reasons )
What Is Term Life Insurance?
Term life insurance is a type of life insurance that remains in effect for only a specific period of time. Another term for term life insurance is pure life insurance. Term life insurance is typically much more affordable and is good if you only need life insurance for a specific amount of time. Term life insurance typically has 10, 20, or 30 years coverage periods. You can apply for another term if you outlive the last life insurance policy.
The only benefit of term life insurance is that it guarantees that a death benefit will be paid out to your beneficiary if you die during the policy term. There are no other benefits you will get, such as savings.
The amount you will end up paying for your term life insurance premium will depend on the information that is on your application. Insurance companies will consider factors such as your age, health conditions, legal history, and even how you spend your free time if you take part in high-risk activities. Term life insurance premiums could increase every year at renewal, depending on the type.
The total value of your term life insurance policy will be paid out to your beneficiary when you die during the policy term. Your beneficiary should be someone close to you who will use the insurance claim to cover your funeral and pay off any outstanding debt you may have.
>>MORE: How Does Pet Insurance Work? (All You Need To Know)
Types Of Term Life Insurance
There are different types of term life insurance, including level term, yearly renewable term, and decreasing term life insurance policies.
- Level Term Life Insurance: Level term life insurance is a term life insurance policy that remains “level” throughout the policy. By remaining level throughout the policy, this means that your insurance premium paid and the death benefit will stay the same amount for the entire policy. Therefore, with level term life insurance, you have less worry about not being able to pay your insurance premium due to annual increases.
- Year Renewable Term Life Insurance (YRT): Yearly renewable term life insurance is a type of term life insurance renewed each year. When applying for life insurance, your premium will be quoted for only one year. The insurance premium will increase with the age increase when the next year comes. Each year the premium will increase to cover the increased risk of death from aging. Yearly renewable term life insurance can be very affordable starting, but the costs will slowly increase each year.
- Decreasing Term Life Insurance: Decreasing term life insurance policies are policies where the policyholder will pay the same amount of premium during the entire policy term, but the amount of death benefit paid out to beneficiaries decreases each year.
>>MORE: Can Insurance Companies Deny Coverage? (Full Guide)
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance that will be in effect for the rest of your life. Whole life insurance does not only pay out a death benefit but also can accumulate in savings. You, as the policyholder, can also access the part of the life insurance that collects cash value while you are still living. It will help your loved ones pay for your funeral expenses and unpaid debts, but you can also access it when it’s necessary.
You can pay more than the insurance premium to build the cash value savings, building up and earning interest over time. Typically the amount of cash value that you build up ends up being more than the amount of premium that has been paid overall due to the growing interest.
You will be able to access the funds while you are alive. You can withdraw the funds up to the premium paid, and these withdrawals would be tax-free. You may also borrow against the built-up cash value, which of course, you would have to pay back. If the total amount borrowed as a loan is not paid back when you die, the difference is deducted from the death benefit paid to the beneficiaries.
Many factors will affect how much you will pay for whole life insurance. For example, the insurance provider will consider your age, gender, fitness, health conditions, substance abuse, legal history, and risky activities to determine how much premium you will have to pay.
Some life insurance companies have whole life insurance that can also earn annual dividends. These dividends can increase the cash value and the death benefit when the policyholder dies.
>>MORE: How Does Gap Insurance Work Through Dealerships? (Full Guide)
When To Get Term Life Insurance
With term life insurance, you can get a lot of coverage for a smaller premium. If you are young and just getting on your feet, then getting term life insurance may be the best option because you’ll be better able to afford it.
If you are not planning to have kids or anyone who will depend on you when you die, term life insurance may be best. If you have children, but they are older and on their feet making their own money and will be able to afford to pay for your funeral while still taking good care of themselves, it may not be necessary to get whole life insurance.
Term life insurance is good enough for most people because you can get a significant amount of coverage for a specific amount of time. If your term is up and you’re alive, you can easily apply to get coverage again if you need it.
>>MORE: Landlord Insurance Vs. Homeowners Insurance: What’s the Difference?
When To Get Whole Life Insurance
Whole life insurance is much more expensive than term life insurance. Whole life insurance can cost a couple of hundred dollars per month. Therefore, whole life insurance may not be ideal for someone who does not have a good steady income and can afford to pay that much for life insurance every month.
If you’re able to afford whole life insurance, then you might want to get it because of the benefits that it offers while you’re still living. In addition, when needed, accessing the saved cash value is an excellent benefit of whole life insurance.
Suppose you want to leave your family behind a legacy and some extra money; in this case, whole life insurance is the best choice for you to go with. Choosing whole life insurance will allow the beneficiaries to be paid out your death benefit and possibly extra due to the dividends paid out, depending on the insurance company. So your beneficiary getting that extra amount of cash can help them out a lot while dealing with your death.
Think of whole life insurance as a lifelong investment that offers future benefits, and if it’s something that you can afford and see value in the extra benefits, then whole life insurance might be the best option.
>>MORE: Are Insurance Settlements Taxable? (Full Tax Guide)
Conclusion
In the end, insurance needs depend on every person’s specific situation. So when you decide which type of life insurance to get, make sure to do extensive research yourself; from doing your own research, you’ll know what kinds of questions to ask when you go to speak with an insurance advisor. It is also a good idea to talk to your family members or whoever you choose as your beneficiary to see what they think will be necessary to help them out if you die. You should think about their situation. For example, if they do not have much money, planning your funeral or taking care of those you are currently responsible for would be challenging.
It would be best to talk to different companies before choosing which one you will be insured by. Check to ensure that the insurance companies offer you the kind of coverage you need. You can also search around to ensure that you get the best deal. Read reviews about the different companies to see other people’s experiences with the various insurance companies. Check and discuss the clauses in the insurance policies to ensure that there will be nothing that will surprise the beneficiary when you die, and they make the insurance claim. You want to make sure that the life insurance you get will provide the most amount of protection to yourself and your beneficiaries.
>>MORE: Burial Insurance Vs. Life Insurance: What’s the Difference?
Sources
- https://www.investopedia.com/terms/w/wholelife.asp
- https://www.valuepenguin.com/decreasing-term-life-insurance
- https://www.hdfclife.com/insurance-knowledge-centre/about-life-insurance/what-is-term-insurance
- https://www.policygenius.com/life-insurance/learn/whole-life-versus-term-life-insurance/
- https://www.forbes.com/advisor/life-insurance/whole-life-insurance/
- https://www.ratehub.ca/blog/term-vs-whole-life-insurance/