Life insurance can be a confusing topic, and it gets even worse when you start to come across such phrases as “whole life insurance.” When it comes to purchasing life insurance, many people aren’t sure where to turn, and they find themselves struggling to figure out which policy is best for them and their families.
This is particularly the case for people trying to decide between life insurance and whole life insurance.
Fortunately, making that distinction isn’t as difficult as it might seem.
What is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance policy that provides whole life coverage. This kind of insurance also features an investment feature which allows policyholders to grow the policy’s cash value. While the growth is slow and tax-deferred, these systems allow people to borrow money against them if they’re facing unexpected life circumstances. If you do choose to borrow money against the policy, however, you’ll have to repay it with interest or risk reducing the payout benefits your family will receive at the time of your death.
In these plans, the monthly premium remains the same for your entire life, and your death benefits are guaranteed. What’s more, the cash value in the policy grows over the duration of the coverage.
What is Term Life Insurance?
Term life insurance is a bit different than whole life insurance in that it doesn’t offer whole life coverage. Instead, term life insurance only covers you for a set time. Sometimes called” pure life insurance,” these policies are designed purely to protect your dependents if you die prematurely. If you die within the predetermined timeframe of your policy, your dependents receive your death benefits. If not, they receive no payouts.
With these terms, the most common duration of coverage is 200 years, with some policies stretching up to 30 years or more. In most cases, the premium of the policy stays steady throughout its duration. People purchasing these policies do so during times when their family would most need coverage if they were to pass away, such as when the children are in college or someone else is on disability or unable to work.
Which Type is Best for You?
The decision of which life insurance policy is best for you is a deeply personal one, and it depends on things like your station in life, financial safety net, and family position.
If you’re a relatively healthy, young person looking for a way to cover your family should you die unexpectedly or prematurely, term life insurance is a valid option. Ideal for people who want to ensure their spouses and children would be cared for while the kids are still dependents and before their homes are paid off, for example, term life insurance can be a fantastic way to enjoy the peace of mind coverage offers without committing to whole life insurance.
If on the other hand, you’re a relatively older person looking to insure your family and grow your wealth all at once, whole life insurance is a fantastic option. Ideal for people who want to use their insurance policies as an investment opportunity, whole life insurance policies accrue value over the term of the policy, allowing the people who hold them to enjoy bigger payouts and more benefits along the way. Plus, since their policies remain fixed throughout the duration of the plan, they’re an affordable way for healthy people to lock in high-quality insurance that will benefit them as they get older.
While the difference between whole life insurance and term life insurance can be confusing, it’s not as difficult to decipher as it may seem. By understanding what each policy is and who typically uses it, it’s easy to develop a feel for which policy would benefit you and your union most efficiently. What’s more, understanding how each policy will affect your finances, and which will grow your money and which won’t is a great way to ensure you’re selecting the right policy.
Today, it’s not enough just to have coverage – you also need to have coverage you know you can rely on to protect your family and dependents entirely when you pass away. Understanding the difference between these two common insurance types is the first step in making an informed decision there.