At its core, life insurance provides a set amount of money, called death benefit, to your intended beneficiaries (your loved ones, charity, lender, business partner, etc.) in the event of your passing. There are various types of life insurance – each designed to serve specific needs of the policyholders. The two most common life insurance types are Term Life Insurance and Whole Life Insurance.
- Term Life Insurance: Term life insurance provides a death benefit for a fixed number of years – usually 5, 10, 15, 20, 25, or 30 – that you choose when you buy the policy. You pay premiums for each year of the term. When the term is up, you stop paying premiums and you no longer have coverage. If you die at any point during the term, your beneficiaries receive a death benefit. If you die after the term ends, your beneficiaries get nothing. You may be able to renew your insurance policy depending on your age and health condition when the original term is up, but usually at a sizably higher premium. Term life insurance is the simplest and least expensive type of life insurance. It is designed for temporary coverage needs and has no cash value. There are three major types of term life insurance – level term, decreasing term, and increasing term.
- Whole Life Insurance: Whole life insurance provides a death benefit for your entire life no matter how old you get. As long as you regularly pay your insurance premium, whole life insurance pays a death benefit whenever you die—even if you live to 100! You may choose to spread your total whole life insurance premiums out over just 10, 15, or 20 years, instead of over a lifetime, to eliminate the ongoing expense of life insurance premiums before retirement. Whole life insurance is significantly more expensive than term life insurance primarily because it not only provides you the coverage for your entire life, but also allocates a portion of your insurance premium towards building up cash value for you. Think of building cash value as building equity in your home. This cash value is guaranteed to grow at a certain amount each year and you can borrow against it for various needs. Whole life insurance is designed for permanent coverage needs. There are three major types of whole life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.
Because whole life insurance is more costly and difficult to understand than term life insurance, many people believe that investing the money they save by purchasing term life insurance instead of whole life insurance will be a better use of that money. While that may be true in some situations, it is not always the most efficient way to address your coverage needs. There are many situations in which whole life insurance is warranted even though it is more expensive than term life insurance.
So which one is better – term life insurance or whole life insurance? Well, while there are situations in which one is usually more appropriate than the other, generally the answer depends on your personal situation. For example, term life insurance is usually more appropriate when you need life insurance only to replace your income over a certain period, such as the years you are raising children or paying off your mortgage. On the other hand, whole life insurance is generally more suitable when you want to provide money for your heirs to pay estate taxes, leave an inheritance or money for final expenses, equitize inheritances, or if you have a lifelong dependent such as a child with special needs. However, every policyholder has a unique situation and coverage needs, and there are several factors that need to be considered to determine whether term life insurance or whole life insurance is more appropriate for their situation. Usually your insurance agent considers factors such as your age, health, family situation, coverage needs, and financial goals, to determine which policy type is better suited for your situation.