Whole vs. Term Life Insurance: What is the Difference?

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Understanding the different types of life insurance can help you provide for your family after you are gone. The main types are term and whole life insurance. But do you know enough about this topic to make the right decision and help secure their future? 

This is a big question because many people do not understand the differences between whole vs. term life insurance. Ready to learn everything you need to know about this topic in order to make a decision that could affect your family for decades? Keep reading to discover all the answers you need. 

Understanding Life Insurance: Term vs. Whole 

If you are considering life insurance coverage, term and whole are two of the most popular options. Each one has strengths and benefits, and it is important to know what distinguishes these policies. 

Term policies only cover you for the specific time you sign up and do not gather any cash value (more on this later). Most carriers allow you to get policies for up to 30 years, so while this coverage is limited, it is possible to lock in a good rate for decades. 

By contrast, whole life policies gather cash value over time and are designed to last until you die. That may sound great, but factors such as a higher cost mean that such a policy will not work for every policyholder or their family. 

The Crux of Term Life Insurance 

When the future of your family is on the line, it is important to understand the most important details of any policies that you purchase. Fortunately, it is easy to understand term coverage because it has two chief benefits that may be uniquely suited to your needs. 

The first benefit is that compared to whole life policies, term policies are typically much more affordable. That may not seem like a major consideration if your budget is not a concern, but as noted before, these policies can last for as long as three decades. A more expensive policy can add up over time and jeopardize the primary goal of most policyholders: leaving behind as much money as possible for their spouse and children (to maximize this, make sure you understand taxes on life insurance distributions). 

The other major upside is you can time different policies to different milestones. For example, you may want a policy to last until your mortgage is paid off, ensuring that payment for the house will be taken care of in case you unexpectedly pass away. You can also time policies to last until your children have graduated from college, ensuring that their higher education will be fully funded if you should pass away before they complete their four-year degree. 

The Intricacies of Whole Life Insurance 

Like term policies, whole policies are relatively easy to understand because they, too, have two chief benefits. The first and most obvious of these benefits is that your coverage lasts until you pass away. This alone can provide serious peace of mind, knowing that your policy will not expire right before it is needed. 

The other chief benefit is that whole coverage accrues a cash value over time. After enough years have gone by, you will be able to withdraw funds against it. These funds are usually tax-free, and being able to withdraw them at any time can help you fund momentary financial needs. In the longer run, you can potentially use the cash value of your policy to help make estate planning that much easier. 

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Key Differences Between Term and Whole Life Insurance 

Each policy has its own set of pros and cons. Examining these may make it easier for you to decide which policy works best for your situation. 

Pros of Whole Life Coverage 

Depending on the carrier, you may be able to lock in a set rate that never changes. This can help alleviate the fear that your premiums will increase as your health worsens. You can also borrow money from the cash value that has accrued. These funds are usually easier to secure than traditional loans, and you will likely get better terms using this method than going to the bank and requesting a loan. 

Cons of Whole Life Coverage 

Compared to term policies, whole policies are typically much more expensive. Additionally, you must be wary of letting your coverage lapse because this can result in surrender charges and other unexpected fees, jeopardizing the benefit intended for your family. Speaking of benefits, if there are still any outstanding loans on your account when you pass away, it will reduce how much your family gets paid. 

Pros of Term Life Coverage 

By far, the biggest benefit of term insurance is that it is cheaper than a whole policy. Additionally, this coverage is much more straightforward, meaning it will likely be easier for you to understand. It is the right coverage for you if you just want something available to help your family while there are still children and a mortgage to consider. 

Cons of Term Life Coverage 

One of the big drawbacks of these policies is they do not accrue cash value over time, so such a policy will not be worth more 30 years from now than it is today. Additionally, these policies are limited to a specific length of time, which may not be ideal for those looking for lifetime coverage. When that time ends, you do not receive any of the cash back you have paid in over the years. 

Who Should Consider Which? 

As you can see, each of these forms of insurance has its own strengths and weaknesses. Neither one is inherently better or worse than the other. If this is your first time purchasing a policy, you should also be prepared for your life insurance health screening in case it is a requirement. 

Ultimately, by understanding more about who each of these policies is designed to protect, you can better decide which policy you want to purchase. 

Is Term Life Insurance the One for You? 

This type of coverage is primarily useful for those who need coverage for only a short period of time. You can also “stack” policies by getting different coverage amounts for different years. For example, you can take out three different policies of differing amounts, each one expiring after major milestones (such as children completing college, you and your spouse paying off the mortgage, and you retiring). Done right, this can maximize your protection while minimizing your investment. 

Making Sense of the Ideal Whole Life Insurance Candidates 

Whole policies are most useful for those who want a single plan offering a certain level of protection for as long as they live. It can also be very beneficial to those who wish to use the accrued cash value to help with retirement planning. That being said, it is important to maximize contributions to your 401(k) and IRA before relying on insurance as a retirement investment. 

Alternatives to Term and Whole Life Insurance 

Term and whole life insurance are not your only options when you need protection for your family. For example, if you are primarily concerned about your spouse being able to pay off the house, you can invest in mortgage insurance. If you are worried about dying or getting disabled in an accident (as opposed to simply dying of natural causes), you may want to consider getting accidental death and dismemberment insurance. 

Otherwise, if your primary goal is to help fund your retirement, you can make investments, max out your 401(k) and IRA, and consider investing in annuities. Keep in mind this does not have to be an either/or situation. It is entirely possible to combine all these products as part of your retirement planning strategy. 

Get a Quote on the Type of Life Insurance That Fits You Best 

Now you know the most important details about these two types of insurance. But do you know where to get the best policy, regardless if you choose term life insurance or whole? 

At InsureOne, we know that no two families are alike, and we are ready to create a custom plan that best suits your needs. To give your family the security and protection they deserve, you can get a quote online in minutes. If you have questions or want a more personal touch from start to finish, you can also contact us by phone at 800-836-2240. Speaking of personal touches, you are always welcome to visit an InsureOne office near you today.