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If you have a family to provide, you may consider life insurance as a way to protect them when you die. Life insurance pays out a fixed amount to your spouse, children or other beneficiaries in the event of your death.

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Term and whole life insurance are two common types of life insurance with many similarities, but there are also some important differences in how you pay and how long the policy lasts. When you’re shopping for life insurance, it’s important to know the difference before making a decision. Learn more about both types so that you can choose the right type of life insurance for your needs.

Credible lets you compare life insurance rates through its partner, PolicyGenius.

Term vs Whole Life Insurance: What’s the Difference?

A term life insurance policy lasts for a specified number of years and your family gets benefits if you die within that time period. Whole life insurance also pays a death benefit and lasts for your entire life, but costs significantly more.

What is term life insurance?

Term life insurance is also known as “pure insurance” because it works like a complete insurance policy. This term is for a specified period – for example, 10, 20 or 30 years, or until a policyholder reaches a specific age. As long as you pay your monthly premiums, your beneficiaries receive a death benefit if you die within that period. You generally have the option of renewing your policy when you reach the end of the term.

Term insurance is cheaper than whole life policies, though the cost varies depending on your age and your health at the time of taking the policy. For a 40-year-old in good health, premiums for a $1 million benefit can cost between $60 and $70 per month.

What is Whole Life Insurance?

Whole life insurance is much more complicated. This type of policy covers you with a specific death benefit till death, irrespective of your age.

Your premiums go into a type of savings account that is invested by the insurance company. The cash value component of your account increases as you make payments over time. You may be able to borrow at this value, although you may lose your profits if you fail to repay the loan. Unlike term life insurance, once you have created a cash value, you can get that policy value back if you cancel your whole life insurance policy.

Whole life insurance is far more expensive than term life insurance. The same 40-year-old in the example above would pay $1,000 to $1,300 per month for a whole life insurance policy with a profit of $1 million.

You can use PolicyGenius, a trusted partner, to shop around and compare life insurance rates.

Term vs Whole Life Insurance: Pros and Cons

As you weigh the two types of life insurance, consider their pluses and minuses.

term life insurance

professionals

  • lower prices Term life insurance is much cheaper than whole life insurance for the same death benefit. You may be able to buy a sum insured that you could not afford with a whole life policy.
  • renewable You may be able to renew your policy at the end of the term to maintain coverage. For example, if you still want insurance after a period of 20 years, you may be able to renew for the next 20 years.
  • estimated profit Your benefit remains the same throughout the term, so you know how much your beneficiaries will receive if you die. If you buy a policy with a profit of $1 million, you know that your family will receive it as long as you continue to pay premiums for your policy.

Shortcoming

  • expenses may increase – Your premium may increase significantly when you renew at an older age. A 20-year policy that you opt for at age 30 is likely to be cheaper than a 20-year policy renewed at age 50.
  • no cash value — If you cancel your policy or fail to pay your premium, you do not get any money back. When the policy lapses, there is no accumulated savings.
  • coverage ended If you die after the term of your life insurance, your family does not get any benefits.

whole life insurance

professionals

  • lifetime coverage — Your coverage lasts for the rest of your life, as long as you pay your premiums. If you die at the age of 100, your family will still receive benefits if you are up to date on your policy.
  • cash value — Your whole life insurance policy has a value that increases over time against which you can borrow. If you terminate your policy, you may also receive the cash value of the policy back. Also, you can get dividends on your investments which you can use to pay your premiums or for any other expenses.
  • estimated profit Your benefit will remain the same for the life of your policy. A policy with a $1 million benefit will pay that amount whether you die at age 40 or age 90.

Shortcoming

  • high cost Whole life insurance is several times more expensive for the same benefit. These higher premiums mean you won’t be able to buy as much coverage. For example, you may be able to afford a benefit of $1 million with term life insurance, but only $250,000 with a whole life policy.
  • more risk involved — Whole life insurance is a more complex product, and you can lose your coverage if you don’t follow the rules regarding loans on cash value or other provisions. You may also be affected by your ability to borrow against your policy and get into financial trouble.
  • low growth rate — If you are using whole life insurance as an investment, you may be disappointed with the return and slow growth of your policy’s cash value.

Term vs Whole Life Insurance: How to Choose

Keep these factors in mind while choosing between a life insurance and a whole life insurance policy:

  • cost and premium — Check out the monthly premiums and other costs you pay for any type of insurance and see if they fit your budget.
  • payment Death benefit is an important aspect of life insurance. Make sure you are buying enough coverage to take care of your family in the event of your demise.
  • cash value — If you’re weighing whole life insurance, take a look at how cash value is calculated and how much you may be able to use.

When to consider term life insurance

  • You are a young, healthy individual who wants to protect your family during your prime working years at a low cost.
  • Your financial goal is to pay off your mortgage or pay for your child’s college education.
  • You have a limited budget but still want coverage.
  • You like to invest your money with more flexibility and higher returns.

When to consider whole life insurance

  • You want a policy that covers your entire life.
  • You want to make an investment that will grow over time.
  • You have some dependents that you want to care for for the rest of your life, such as a disabled child.
  • You have a huge amount to spend on life insurance coverage.

When you’re ready to apply for life insurance, use trusted partner PolicyGenius to compare life insurance rates in minutes.

Other types of life insurance to consider

A term life policy and whole life insurance are not your only options. Here are some other types of permanent life insurance you can consider:

  • Universal Life Insurance — This type of insurance is more flexible and allows you to adjust your premium payments once your account reaches a certain level of cash value. Your investment grows at the same rate as a money market account. This is also known as adjustable life insurance and can be helpful if your financial situation changes.
  • indexed universal life insurance – These policies move at a rate linked to a certain market index, such as the Dow Jones Industrial Average or the S&P 500. The rate you get is likely to be lower than the actual movement of the index.
  • variable life insurance Variable life insurance allows you to choose how your premiums are invested, but the death benefit and cash value of your policy may change based on the performance of your investments.

When you compare the different types of life insurance available, you may want to consider working with a financial advisor or insurance agent at a life insurance company to help you figure out which type is best for your financial needs. Policy is the best. Also, keep in mind that you are not locked into one type of life insurance. You may be able to switch one type of policy to a new one as you get older.