What Are Term And Whole Life Insurance?
Two of the most common types of life insurance are term and whole life. Whole life is a form of permanent life insurance that lasts as long as you live (assuming you pay the policy’s premiums). It also includes a cash value account—a type of savings account that grows tax free over time and that you can withdraw from or borrow against while you are alive. Term life insurance, on the other hand, lasts only for a certain number of years (the term) and does not accrue any cash value.
Key Features
| Term Life | Whole Life |
|---|---|
| Basic coverage with a finite duration | Permanent coverage that lasts your entire life |
| Cheaper than comparable policies | More expensive than term policies |
| Easier to understand | More complex |
| Protection only available for the term of the policy | Lock in premiums for life |
| Cannot be used as a wealth-building or tax-planning strategy | Allows you to borrow against or withdraw from the policy for other financial needs |
Term Life Insurance
Term life insurance is straightforward insurance without a savings or investing component. The policy promises a death benefit for your beneficiary should you pass away while it’s in force. For many people, it’s a way to make sure that their minor children are provided for and their mortgage is paid after they die. Term insurance is only good for a certain period of time, whether it’s five, 20, or 30 years. After that, the policy expires. Costs are much lower than for many other types of life insurance. Protection is only available for the term of the policy and it cannot be used as a wealth-building or tax-planning strategy.
Whole Life Insurance
Whole life insurance is a form of permanent life insurance, which lasts your entire life. It offers several living benefits deriving from its cash value accumulation, which can be borrowed against or withdrawn during your lifetime. Whole life policies are typically more expensive than term policies but offer the advantage of locking in your premiums for life. Most whole life policies are “level premium,” meaning that you pay the same monthly rate for the duration of the policy. One part of your payment goes to the insurance component, while the other part helps build your cash value, which grows over time. The main disadvantage of whole life insurance is its complexity and cost.
Conclusion
If term coverage is all you can afford, then basic protection is better than no protection at all. If you need permanent coverage that lasts your entire life, whole life is likely preferred. Whole life also offers several living benefits deriving from its cash value accumulation, which can be borrowed against or withdrawn during your lifetime. Regardless of insurance policy type, premiums will be lower the younger (and healthier) you are when you buy it.
