When it comes to life insurance, term and whole life are the two options you will hear most about. But do we really know the difference between the two? Aside from cost differences, there are other factors to consider that can help you to make the choice between whole and term life. In truth, you need to know the difference so that you can make an informed choice. With that in mind, here is the difference between whole and term life coverage.
Term Life Insurance
When it comes to term life insurance, it is likely to be the one policy that is the easiest to understand out of the two. The reason you buy term insurance is that there is a death benefit that will go to your spouse or family upon your death. It is fixed over a term, hence being called term life insurance, so there is an expiration date. You could take a term insurance policy out for five, ten, or twenty years, but once the deadline comes, the policy expires and you would need to apply for a new one.
Term Life Benefits
As a term life insurance policy is straightforward, one of its major benefits of it is its simplicity and ease of understanding. You get coverage, with definitions within it, for a specific time, and then that’s it. Term life policies are also seen as being more affordable because you are only taking out a policy for a set period of time.
Term Life Disadvantages
Like with most things there will be drawbacks. For example, while it is affordable, if you were to add a larger death benefit or look to extend the policy for a longer period of time, then this would raise the premiums. You also need to be mindful that should the end of the term life policy come, and you haven’t used it, it can be seen as a bit of a waste of your investment. That being said, you can then pay out again should you wish to have life insurance.
Whole Life Insurance
Whole life insurance covers exactly what it says. It is a life insurance policy that you will have for the duration of your life, no matter how long that will be. It doesn’t expire, and it can provide a cash value as well as a death benefit, which can be very useful.
Whole Life Benefits
There are a number of benefits of obtaining whole life coverage. As long as the premiums are being paid, there is no expiration on the policy, which does give you peace of mind. The premium gets usually gets split up. A portion pays for the insurance, and the other part goes towards building up your cash value. Some insurers will offer a guarantee on the interest rates as well, which can help toward building your cash value. You also tend to pay more upfront, which is called front-loading your policy, which helps to build up the cash value that you can then draw down from in the future.
Whole Life Drawbacks
The main drawback is that the premiums are usually much higher. This is because you are effectively paying for two things, the insurance, and the build of the cash value. You also need to be mindful that if you do draw money from your policy, this will affect the death benefit. They aren’t seen as two completely separate entities like you might expect. You also may have to pay fees to stop or cancel a whole life insurance policy, compared with just stopping payments on a term life insurance policy.
Life Insurance Conclusion
The main differences between the two policies would be cost and the time period in which you have insurance. Many people choose term life insurance for these two reasons. But don’t take just our word for it. These other authority publications explain the differences quite well:
Hopefully, this has made you more aware of the difference between whole and term life insurance.