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Between whole and term life insurance, the decision on which is best for you can be a stressful one. One determining factor to keep in mind is how much you can afford compared to the value you’ll receive.
Let’s break down the difference between term life insurance and whole insurance and whether opting for term might mean losing money in the end.
Whole life
A whole life insurance policy will span your entire life from the point of purchase until your death. Regardless of how long that policy lasts, whether it be ten years or eighty, you will be covered.
Term life
On the other hand, a term life insurance policy is set for a certain amount of time. When shopping for life insurance policies, you’ll work with the insurance company to determine which term is best for you. Popular choices include 10, 15, and 25-year policies.
Aside from the timeline that your chosen policy covers, there are other key differences to note between whole and term life insurance policies.
Term Life Insurance Policies Do Not Have Cash Value
If you’re looking for an adaptable life insurance policy to grow with you in life, a term policy is most likely not the best choice for you. You won’t be able to borrow against it like you may be able to with a whole policy. No cash value also results in less expensive premium payments (more on that below).
Most life insurance policies are not taxable upon payout, which is why they are such a great economic tool. While beneficiaries won’t usually need to pay taxes on the cashout, you may find that any interest accrued is taxable. Be sure to speak with your insurance company and financial planners for more information on those processes.
Because a term life insurance policy covers a shorter period of time, there is less risk for the insurance company.
A whole policy guarantees the insurance company will need to pay your beneficiaries at some point, but a term life insurance policy has no guarantee of your death during that period. With this, term life insurance policies are generally considered less expensive than whole policies when it comes to monthly premiums.
The golden question: is a term life insurance policy worth it? In a nutshell, yes. Term life insurance offers many benefits, including flexibility.
If you’re young or have changing beneficiaries and life insurance needs, a term policy can be a great option to keep you covered without being locked in for life.
If you decide down the line that a whole policy would be the better option for you, most policies come with a complimentary conversion period of up to an average of 5 years (or an age cap) in which you can switch from a term policy to a whole policy.
The reduced cost of a term policy and the added benefits make the policy type a great policy choice, especially for those who require additional flexibility.
