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Term versus Whole Life Insurance: Which is right for you?

Term versus Whole Life Insurance: Which is right for you?
By Ajita Jha
Term Life Insurance 
Term life insurance provides coverage for a specific period of time. It is also known as “pure life insurance” because it is made only to support your family or dependents in case you die unexpectedly. If you are a holder of term policy and you die within the term, your beneficiaries will get the amount. This policy holds no other value. 
The term is chosen during the time you buy the policy. Common time periods are 10, 20, 30 years. In most of the policies, the payout or death benefit or premium remains the same throughout the term. 
While choosing the term life, take care of the following:
  • Choose a term that covers the years you will be earning for the family and want life insurance in case you die. 
  • Buy an amount that would be sufficient for your family when you no longer are there to look after them. The payout can help your family live a comfortable life in your absence. 
 
Whole Life Insurance
Whole Life Insurance provides a life-time coverage and involves a component of investment called the policy’s cash value. The value of cash increases slowly in a tax-deferred account, it means that you will not be required to pay taxes on its gains while they are piling up. 
You can borrow funds against the account or renounce the policy for money. However, if you do not pay off policy loans with interest, the death benefit will get reduced and if you give up the policy, you will lose the coverage. 
Whole life insurance is slightly more difficult to understand in comparison to term life insurance, but it is the most uncomplicated type of permanent life insurance. Here’s how:
  • The premium never fluctuates, it stays the same until you live 
  • The death benefit is assured
  • The cash value account increases at an assured rate
There are certain whole life policies that also earn annual dividends, which pay you back after deducting the insurer’s profit. You can acquire the dividends in cash, earn interest by leaving them in your account, repay policy loans, and use them to reduce your premium payments or buy extra coverage. Remember, dividends are not guaranteed. 
 
 
Term Life versus Whole Life: features of the policy 
Policy Characteristics 
Term life insurance
Whole life insurance
Can choose policy length
 
Gives lifetime coverage
 
Premium remains the same
Low premium
 
Guaranteed payout amount
Accumulation of cash value
 
Possibility of eligible annual dividends
 
 
Cost Comparison between term life insurance and whole life insurance 
Term Life Insurance is relatively cheaper because of its temporary nature and it offers no cash value. In most situations, your family will not have a chance to receive a payout because you will survive until the end of the term. On the other hand, the premiums of whole life insurance are much higher because the coverage is life long and the policy holds cash value. It offers guaranteed return on investment on a part of the money you pay.
 
Making a choice between term life and whole life insurance 
Term life suffices most of the families who require life insurance, but whole life insurance or other types of permanent coverage can be more beneficial in some situations.
 
When to choose term life insurance? 
  • If you merely need life insurance to substitute your income for a definite period, such as the years you are paying off your mortgage or raising your children.
  • If you are looking for more affordable coverage.
  • If at a particular point in time you cannot afford permanent life insurance. Most of the term policies can be turned into permanent coverage however, it comes with certain terms and conditions.
  • If you have better options for investment. Taking out more affordable term policy will allow you to invest what you have paid for whole life insurance.
 
When to choose whole life insurance? 
  • If you wish to provide money for your successors to pay out estate or inheritance taxes.
  • If you have someone who is reliable on you for a lifetime such as a child who is specially-abled or have a certain ailment.  
  • If you want to spend your retirement savings and still do not want to run out of money when you are gone. You wish to leave money for funeral expenses.
  • If you have more than one child and you want to leave your property or business only to one child. You can use the amount to equalize inheritances by leaving it for other children.
 
Other options of Life Insurance 
If you are looking for lifetime coverage but need more investment options in your life insurance then you can choose from other kinds of permanent life insurance:
Variable Life Insurance: it provides you access to the direct investment in the stock market
Universal Life Insurance: it pays you interest depending upon the current market rates
Indexed Universal Life Insurance: it gives interest based on the movement of stock indexes.
Along with the investments they provide, all of these options are more affordable than whole life- if the market shows cooperation. While term life and whole life policies have their costs decided from the very beginning, these options can fluctuate based on the choice of your policy and performance of your cash account. It can either result in great savings or unexpected expenses.
 
Conclusion 
Regardless of what type of life insurance you need, always remember to shop around and compare quotes to get the best rate. Also, an authorized life insurance agent or financial planner can help you find out which kind of life insurance is perfect for you. However, before coming to any conclusion, you can also ask yourself some questions such as:
  • How much can I afford to pay every month for my life insurance?
  • What are my assets, debts, and estate value?
  • Whether I want to leave behind something for my family members?
  • What are the goals of my life insurance?
By asking these questions and understanding how whole life and term life insurance could address each of them, you can make the best decision for yourself and your family.