When shopping for life insurance policies, most people have to make a choice between term life and whole life insurance policies. These two life insurance policies are perhaps the oldest varieties of insurance and remain among the top most popular types of insurance policies. Shopping for life insurance policies is not fun, it is a daunting task, one that requires you to do a lot of research to determine what best works for you. These two insurance policies however different they may seem, have a common characteristic in that the more you delve deeper into each, the more complicated it gets.
What are Term Life Insurance Policies?
Just as the name suggests, a term life insurance policy is a type of life insurance policy that covers an individual for a certain period of time. Term life insurance policy is usually designed to protect the policyholder’s family from premature deaths. This type of insurance is “pure.” The policyholder has to pay premiums on a regular basis for a specified period of time usually between 10-30 years. If the policyholder dies within that timeframe, their beneficiaries will receive the death benefit payout.
Compared to the other life insurance policies, term life is straightforward and very affordable and usually presents a more compelling selling point for the people who are interested in a simple life insurance option. What you need to understand about term life insurance policy is that it has no other cash value except for the death benefit payout. Furthermore, when it comes to term life insurance policy, the key thing to pay attention to is the ‘term’ or the period that the policy is active. This is ideal in that, term life insurance policies usually expire after the term lapses thereby making it a good channel for anyone who expects to build wealth or diversify their investment portfolios.
After 20-30 years, most people usually do not have many financial obligations. Usually, their mortgages are paid off; their kids are already done with school, which means, for the remaining part of their life they can self-insure with their savings. It wouldn’t make any sense to keep paying for a policy that they do not need, hence making term life insurance policy an ideal financial safety net and a great savings plan.
There are many reasons to buy such life insurance policies including the cost of the premium. But term life insurance policies also have their cons in that they are usually limited in their coverage. For people looking for a safety net in their 60s and 70s, they will need to shop for a new policy which is extremely expensive.
What Is Whole Life Insurance Policy?
This is a form of permanent life insurance policy and differs significantly from the term life insurance policy. The main difference between these two life insurance policies is that while term life insurance policy will expire after a set period of time, whole life policy will never expire as long as you pay your premiums. The other difference is that unlike term life insurance policy, a whole life insurance policy provides some cash value in addition to the death benefit.
A whole life policy is much more complicated than the term life insurance policy in that it is an investment-like product. Every time you make a premium, part of it goes to the cash value of the policy. Depending on your policy terms, the part of your premiums is taken each month to fund your savings. Over time, you will find that the policy’s cash value will grow, enabling you to do other things like take a loan that will be insured by the whole life insurance savings. Other than that, this money can be used for your retirement or even fund the policy premiums.
The cash value in these life insurance policies grows in a tax-deferred account meaning the policyholder does not need to worry about paying taxes on the account’s gains while the account is growing. The growth of the policyholder’s money is interest rate driven dependent on the economy, and the policyholder’s money is guaranteed to grow regardless of the conditions in the market.
Let’s consider a scenario where the policyholder did not have a whole life policy but instead had 401K or IRA. If the policyholder borrows cash from the retirement fund before the age of retirement without a substantial reason, then he or she may receive a penalty fee. This obstacle doesn’t exist with a whole life insurance plan. And while the whole life insurance policies are much more complicated than term life insurance policies, to an extent, they are the most straightforward form of permanent life insurance policies since 1) the cash value account grows at a guaranteed rate, and 2) the death benefit is guaranteed.
Whether you need term life insurance policies or whole life policy depends entirely on your financial position and the motive behind the purchase of life insurance. If you need a straightforward policy that will cover you for a certain period of time, without having to spend a lot, term life policies offer the best choice. However, in some circumstances, you may need more options including retirement benefits from an insurance plan and whole life insurance policies offer the best chance.
To summarize, a term life insurance policy is ideal if you are on a budget and you expect to self-insure yourself in the future. On the other hand, a whole life policy is good for you if you want to build cash value or if you have long-term dependents.