Purchasing a life insurance policy can seem like an unfavorable, even morbid, task.
Death and dying are largely seen as taboo topics of discussion, and are therefore avoided in most social situations. Sooner or later, though, everyone passes away. For primary income earners, especially those with dependents, it is important to plan for that inevitability. Life insurance provides one of the best ways to do this. No matter the type of policy, they all protect your dependents in case you die.
The proceeds from a life insurance payout, or a “death benefit” as it is called, can go towards funeral costs as well as expenses that you took care of in life: tuition payments, mortgage payments, car payments, and so on. This ensures that even if you’re not there to make these payments, your dependents will have enough money to cover them.
Term life and whole life are the most popular forms of life insurance, and each has its own unique features.
Permanent life insurance also comes in three different types: universal, variable, and variable universal.
Whole life insurance differs from term life insurance because it is a permanent form of life insurance. The policy is guaranteed to remain valid until the insured dies or the policy reaches its maturity date—in the past, this has typically been when the insured reaches 100 years of age, but recent policies have moved the age of maturation to 120.
This means that your dependents (or you, if you live past 100 or 120) are guaranteed to get money from the insurer.
Whole life insurance also has a cash value component, which is another key difference compared to term life insurance. A portion of your premium payments goes to a cash account, where the invested money has a guaranteed rate of return and grows tax-deferred.
Term life insurance covers you and protects your dependents for a set period of time—a term—such as 10, 20, or 30 years. This means that in the case that you die during your set term, the insurer will pay out a death benefit to your dependents. Because of this, and the fact that they do not accrue any cash value over time, these policies are significantly cheaper. As with whole life insurance, this death benefit (the cash value beneficiaries receive) is also exempt from income tax, making life insurance a particularly attractive way to protect your dependents.
Term life insurance can be thought of as the life insurance equivalent of renting housing instead of buying it. When renting an apartment, you pay a monthly rent for the duration of your lease…but that doesn’t mean you’ve gained any ownership over that property when you move out. Similarly, with term life insurance, you pay a monthly premium for the duration of your term, but when that term is up—assuming you’re still alive—you no longer have that insurance and that money is gone.
|Whole Life||Term Life|
|Those who want a more predictable and stable insurance policy||Those who need help providing for a family’s potential loss of income in the case of death of a primary earner|
|Those who want permanent coverage||Those who want coverage for short-term debts|
|Those who want the ability to withdraw most or all of what they put into it tax free (assuming you follow the strict rules about doing so)||Those needing additional insurance protection during child-raising years|
|People able to afford the higher premiums||People unable to afford higher premiums of whole life insurance|
|People who want to use it as a way to simultaneously save money and receive life insurance||Younger people, as term life insurance is relatively cheap for healthy individuals under 50 years old (though, even after 50, term life insurance is still much cheaper than whole life)|
Choosing a life insurance policy is a personal decision that should be taken seriously. Though each policy type covers your dependents in the case of your death, term life and whole life have significant differences. Especially when considering purchasing whole life insurance, it’s helpful to consult an independent financial planner before making a decision.
Though independent financial planners are your best bet for personalized advice, internet research is a great start. Websites like Insurify can help you compare life insurance quotes so you can find the best policy for you.