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Oct-21
Term vs. Whole Life Insurance: What’s the Difference?
Term vs. Whole Life Insurance: An Overview
Two of the oldest varieties of life insurance—term and whole life—remain among the most popular types. Not that insurance companies haven't tried to make it more complicated to reach a broader range of customers. Shopping for life insurance may not be as fun as reading a spy novel, but they have this in common: The more deeply you delve, the more complex everything gets.
But getting back to basics, what’s the difference between term and whole life, and which one is better for your needs? We’ll break down the key features that distinguish these insurance mainstays.
Term Life Insurance
Term life insurance is perhaps the easiest to understand, because it’s straightforward insurance, without the bells and whistles. The only reason to buy a term policy is because of the promise of a death benefit for your beneficiary should you pass away while it’s in force. As the name suggests, this stripped-down form of insurance is only good for a certain period of time, whether it’s five years, 20 years, or 30 years. After that, the policy simply expires.
Benefits
Because of these two attributes—simplicity and finite duration—term policies also tend to be the cheapest, often by a wide margin. If all you seek from a life insurance policy is the ability to protect your family when you die, then term insurance is likely the best fit if you can afford it. Since term policies are typically more affordable and can last until your child enters adulthood, they could be an option for single parents who may want an additional safety net.
The average 30-year-old man can get a 20-year term policy with a $500,000 death benefit for $27.49 a month. Because of her typically longer lifespan, the average 30-year-old woman can purchase the same policy for just $21.75.
Whole Life Insurance
Whole life is a form of permanent life insurance, which differs from term insurance in two key ways. For one, it never expires as long as you keep making your premium payments. It also provides some “cash value” in addition to the death benefit, which can be a source of funds for future needs.
Benefits
Most whole life policies are “level premium,” meaning that you pay the same monthly rate for the duration of the policy. Those premiums are split in two ways. One part of your payment goes to the insurance component, while the other part helps build your cash value, which grows over time.
Many providers offer a guaranteed interest rate (often 1% to 2% annually), although some companies sell participating” policies, which pay unguaranteed dividends that can increase your total return.
Early on, the amount of the whole life premium is higher than the cost of the insurance itself. As you get older, though, that reverses, and the cost becomes less than that of a typical term policy for someone of your age.4 This is known as “front-loading” your policy.
At a later date, you can borrow or make a withdrawal from your cash value amount, which grows on a tax-deferred basis, to pay for expenses such as your kid’s college tuition or repairs to your home. In that sense, it’s a much more flexible financial tool than a term policy. Loans from your policy are tax-free, although you’ll have to pay income tax on the investment gains from any withdrawals.
source: https://www.investopedia.com/term-life-vs-whole-life-5075430