When planning your family’s financial future, purchasing adequate life insurance is one way to protect them after your demise. Your loved ones can use the life insurance payout to cover the funeral expenses, mortgage, loans, and even medical bills and college education.
Term Life Insurance vs. Whole Life Insurance
As you evaluate various life insurance quotes, you must have noticed that most insurance providers offer term life and whole life insurance. Each has its own merits, but understanding what makes them different can help you choose the right one.
Term Life Insurance
Term Life insurance is a policy that provides you coverage for a limited period, such as 5, 10, 20, or 30 years.
Most term policies typically range between 1 and 30 years. If you buy a term life insurance and die during your coverage period, the insurance provider will pay the death benefit to your policy’s beneficiaries.
However, if you are still alive when the coverage expires, the insurance company does not pay anything, plus the coverage stops. You can renew the policy at its expiration, but the insurer will recalculate the premiums for your age.
Whole Life Insurance
As the name suggests, whole life insurance lasts your entire lifetime. Plus, the premiums on this insurance are higher than term life. Whole life insurance comes with an additional investment component known as the policy’s cash value.
This means the cash value of your policy gradually multiplies. Because the cash sits in a tax-deferred account, you do not have to pay any taxes on the accumulating gains. It even allows you to borrow money or cancel the policy for cash.
In case of borrowing, if you cannot repay the loan with interest, it will end up in a reduction of your death benefit payout. Of course, surrendering the policy will leave you with no coverage.
Whole life insurance is a more complex insurance policy; however, it is a straightforward life insurance option. Firstly, the premium will stay the same for your whole life. The policy ensures the death benefit and the cash value account multiples at a guaranteed steady rate.
Some of the policies even earn annual dividends paying you a little bit of insurer profit. You can either withdraw the dividends or leave them in your account to earn more interest.
Cost Comparison between Term Life and Whole Life Insurance
In the majority of cases, term life insurance is cheaper than its counterpart. The reason? Because the insurance provider knows there are chances that you will outlive the policy’s coverage period.
The healthier your lifestyle, the better are your chances to secure lower premiums as a healthy weight, and avoiding behaviors such as smoking can reduce risks related to life-threatening medical conditions.
For example, here is a cost comparison between 20 years of term life and a 30-year whole life insurance policy for both men and women:
- 20-year Term Life Insurance Premium
For 30-year-old men, a 20-year term life insurance premium for a $500,000 policy will be $246 per year. However, for 30-year-old women, the premium will be $213 per annum.
- 30-year Whole Life Insurance Premium
For a 30-year-old man, the premium for a $500,000 whole life insurance will be $5,178 per annum. However, for a woman of the same age, it will be $4,688 per annum.
Which One to choose
For some families, term life may be sufficient, whereas, others may opt for whole life coverage due to certain circumstances.
However, you must choose term life if:
- You want affordable premiums
- You believe you may need insurance for the rest of your life but cannot afford one
- You need coverage for certain years while you raise your children or till you pay off your mortgage
Whole life insurance is ideal if:
- You want to leave behind money for your loved ones to pay estate and inheritance taxes
- You have a child who needs special care and has a lifelong dependency. You can use the life insurance money to fund special care trust to take care of your child
- Leave an inheritance for your loved ones
Get Experts Advice
If you are still unsure whether you should invest in life term insurance or whole life insurance, you can always get help from insurance experts, such as BTW Insurance. They will not only sit with you to discuss and understand your needs but advise you on the best insurance option that best suits your circumstances and budget.