Life insurance plays an important role in taking care of our family when we pass on. Knowing the difference between whole life insurance and term can help you determine what and when to get the two.
What is whole life
Whole life insurance is a type of permanent life insurance that lasts for the entire life of the insured. It has guaranteed death benefits, cash value growth, potential dividends, and living benefits that allow policy loans to increase the cash value growth or meet certain expenses.
Small whole policies are good for making sure funeral and burial costs are paid for. Whole life policy premiums are the same for their whole life. While they have a higher cost, they have far more use than term insurance.
Whole life policy premiums can continue for the entire length of the policy and paying them ensures the coverage lasts. Premiums can be limited by using a paid-up option of 10 or 20 years.
What is term insurance?
Term insurance usually comes in 10,20, or 30-year periods with some less commonly used periods of 5, 15, and 25 years. If someone dies during the period the insurance company will pay a death benefit payment. If however someone lives past the benefit period the coverage is ended without any payment.
While whole life insurance is permanent, the term is.. you guessed it a temporary policy that has an expiration date. It can be used to protect you from loss of income, pay off a mortgage, or other uses as the benefit goes to a beneficiary tax-free.
Term policies are a good option if your whole life is not financially viable at the moment. Later on, you can either convert the term to a whole life policy or apply for a whole life policy instead of or in addition to. Premium rates get increasingly higher each time the policy is renewed.
So, what are the differences?
To put it in a neat little bow and summarize the conversation, the difference between whole insurance and term insurance is simple. Term insurance is good for a short period of time and only as a pure death benefit. Whole life insurance is intended as permanent insurance to cover final expenses and has utility while alive.
Term insurance is sometimes required by banks or business partners when entering some form of loan or deal when the side giving the loan wants to secure their interest and reduce their risk even more. By having the other party get a life insurance policy with the bank or partner as the beneficiary they can lower risk to an acceptable level.
This is just one way that term insurance can be used. Whole life on the other hand is used quite significantly by banks as collateral for loans, by businesses to increase the growth of their earnings while taking less risk by getting business loans, which isn’t possible for a term to do as it has no cash value component.
Conclusion
There are many types of life insurance available with term and whole life is just 2 of the considerations available to individuals and businesses. What is best for your and your situation is entirely up to you, as there is no such thing as “the best” life insurance. You may find more utility in having low-cost term insurance while you redo your finances to get a cash value building policy for later use. Or you may simply decide you want permanent life insurance benefits but don’t care so much about the cash value growth and just say want to use it to pay off taxes and debts when you die, so possibly a universal life policy is of better use.
Whatever you decide to do make sure it’s based on your own personal research and find agents that have your best interest in mind, not just the company’s bottom dollar or their own commission. In the long run, a satisfied client is more likely to do repeat business and refer than if they feel they got sold. What’s in your best interest?