Are you planning to avail yourself of life insurance? Although understanding this type of insurance can be overwhelming, you can start by knowing the difference between its two main types, term life and whole life. From there, you can gradually increase your knowledge about it. Of course, working with an insurance adviser can be easier, but you should still know the basics.
In this article, we’ll explore the differences between term life and whole life insurance and identify which is the best one for you.
What Is Term Life Insurance?
Term life insurance covers a specific period. If the policyholder passes away during the coverage period, their beneficiaries will receive financial assistance accordingly. However, once the policyholder outlives the coverage, it expires, but they can still avail of another one.
Usually, term life insurance offers around 10 to 30 years of coverage. However, the premium varies for various reasons, such as financial status, health, and term period. In addition, the renewal process also depends on the insurance provider. There are instances when loyal customers are given discounts if they often renew their coverage.
Pros:
- Simple policy. It’s easy to understand since it’s straightforward and only has one component, which is the death benefit.
- Affordable premiums. It costs around 5 to 15 times less than whole life insurance.
- No long-term commitment. Once the term ends, it’s your decision whether you’re going to renew or not. In addition, if your current policy lasts for 30 years, you can avail yourself of the 10-year insurance plan for the next.
Cons:
- No cash value. It’s not possible to cash out the policy or borrow it.
- Coverage expires. Once the policy expires, you can no longer have access to the money you’ve invested. Even if you renew the policy, you’ll still be starting from scratch.
What Is Whole Life Insurance?
Whole life insurance is a long-term, permanent coverage. As long as the policyholder pays their premiums, they’ll stay covered. Although this type of life insurance can be a bit more complicated than term life insurance, it’s also more flexible.
In addition, there’s the cash value that grows over time, and that can be borrowed to pay the premiums and used for other purposes. As for the benefits, the cumulative value of the insurance will be given to the beneficiaries once the policyholder dies.
Pros:
- Has cash value. This type of insurance comes with a cash account. Over time, with the continuous payment of your premiums, you can borrow the money and use it for various reasons.
- Lifelong coverage. There’s no need to renew or start over again once you avail yourself of whole life insurance. However, you should continuously pay your premiums to avoid having problems.
- Fixed premiums. Once you avail of the whole life insurance, there’s no need to worry about whether the premiums will increase over time. At the moment, you are availing of the premium, and you’ll be paying the same rate unless you make some changes.
Cons:
- More complex. This type of insurance can be a bit more complex due to the inclusion of various components, such as the cash value and breakdown of fees.
- More expensive premiums. As mentioned, this type of insurance tends to be around 5 to 15 times more expensive than term life insurance.
- Slow cash value growth. Although there’s the cash value that’s often offered in whole life insurance, the growth of this investment-type component can be a bit slow.
Choosing Between Term vs. Whole Life
After knowing the differences between term and whole life insurance, including their pros and cons, it’s common to still feel lost about which one best suits your needs and preferences. So, here are some specifics about why you should choose one over the other.
Choose Term Life if You:
- Are still young and healthy, and you also have existing health insurance that can cover your financial needs for any sickness.
- Opt for a more affordable option.
- Are not yet ready to commit to a long-term investment.
- Don’t have existing beneficiaries.
- Are looking for other things to invest in.
- Have found an insurance provider that allows the conversion of term life insurance to whole life insurance once you’re financially ready.
Choose Whole Life if You:
- Have existing dependents or beneficiaries.
- Are ready to commit to a long-term insurance investment.
- Are interested in the idea of having cash value that you can obtain over time.
- Want to include life insurance as part of your investment plans.
- Are looking for a more flexible life insurance option.
Final Thoughts
One of the things you should be aware of as an aspiring insurance policyholder is that there’s no such thing as a one-size-fits-all life insurance that fits all. Although there are only two main types of life insurance, term and whole life insurance, both are general, and there are more specific ways to identify what you need.
However, knowing the difference between the two and understanding which one suits your needs and preferences can be a great first step towards becoming a life insurance policyholder. Besides, once you start working with an insurance adviser, they can help you find the comprehensive coverage that you need.
