A life insurance policy can provide comfort in knowing that, should you pass away while covered, your loved ones would have a financial safety net in place.

Although term life insurance typically has a shorter term, it still includes an expiration date. On the other hand, whole life insurance is more expensive but can offer lifetime financial security.

Term and whole life insurance are comparable in providing a guaranteed death payment. These policies do, however, differ in some significant ways. This article examines the differences between term life and whole life insurance.

Term life insurance

Term life insurance policies offer protection for a specified “term” of years or a set amount of time. A death benefit will be paid if the insured passes away within the plan’s specified time frame, provided the policy is active.

Insurance companies can reject claims for several reasons, including if the policyholder passes away during the contestability period, which can run up to two years.

Term life insurance is far less expensive than permanent life insurance in the beginning. However, term life policies don’t have a financial value, unlike most permanent insurance options. In other words, the policy’s guaranteed death payout is its sole worth.

Whole life insurance

Whole life insurance will still be in effect for as long as the insured person lives. Like other permanent life insurance options such as variable and universal life insurance, this policy type often includes a guaranteed death benefit and a savings account known as the cash value.

A percentage of your premium supports the cash value component, which you can draw on at any moment throughout your lifetime.

The cash value of a whole life insurance coverage increases over time. This is assured based on a formula proposed by the insurance provider. Some whole life insurance providers even promise a specific annual rate of return on the policy’s cash value.

Term life insurance vs. Whole life insurance policies

If a term life insurance policy is like renting peace of mind, a whole life insurance policy is like buying it. 

With a term life insurance policy, the agreed-upon life insurance premium is paid on a recurring basis, typically monthly. The payment provided to the beneficiaries under an insurance policy in the event that the insured passes away is known as the death benefit. In essence, it is the sum of money your family will get if you die while the policy is still in effect.

Your decision should mainly be influenced by your unique circumstances, including your family, living arrangements, and financial condition.

It makes sense to acquire term life insurance for the duration of your mortgage if you have one. Whole life insurance coverage, on the other hand, can help you with estate planning for the benefit of your loved ones if you’ve used all other available financial options.

It’s always best to speak with a financial planner before deciding.

Which should you choose?

When to choose term life insurance

  • If you only need life insurance to protect you for a limited time: A term life insurance policy can provide a payout for your dependents to make significant financial commitments, like paying for your kids’ education or paying off your mortgage.
  • If you want the cheapest protection: Term life insurance is the least expensive alternative, particularly if you’re young and healthy.
  • When you don’t want to invest so much in life insurance: You can purchase a less expensive term life insurance policy and save the money you should have spent on buying a whole life insurance policy to invest elsewhere possibly.

When to choose whole life insurance

  • When you can comfortably pay the higher premiums: Since purchasing whole life insurance requires a lifetime commitment, you should ensure you can. Your coverage could expire if you fail to pay the specified premiums on time.
  • If you wish to give your heirs money: Whole life insurance policy’s death benefits can be used as a form of inheritance. If you designate beneficiaries for your life insurance on your policy, the payout will be made to them directly rather than through your estate.
  • If you have a lifelong dependent like a disabled child: A trust that will care for your child after your passing can be funded using life insurance. Obtain legal and financial advice before establishing a trust.
  • When looking for life insurance with a guaranteed cash payout: The whole life insurance policy’s cash values increase at a guaranteed rate decided by the insurer.

Are you looking to buy life insurance? This comparison will give you a rough idea of the distinctions between term and whole life insurance policies so you can choose the policy that best suits your financial requirements.

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30 + years as a Financial Planner. Securities (Series 1,7, and 65) and Insurance Licensed. Retirement Planning including the actual planning of where your income will come from as well as a discussion of products to get you there. The market has been volatile since Covid broke out and many people are not comfortable with this. If you are retired we will look at your total income and tax situation. If you are still working we have some more time to plan.

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