There’s no such thing as a sure thing. That includes your mortality.
If you have a family, few thoughts are more unsettling. But at some point, we all have to face the fact that something could happen to us, and that we need to plan for the worst-case scenario.
The alternative? Something happens to you, and your family could be left twisting in the wind. This is where life insurance can help.
What is life insurance?
Life insurance is a policy that pays out when you die. Just like how auto insurance covers you in the event of a crash, life insurance covers your dependents or cosigners in the event that you pass away.
You can think of life insurance as a life raft. It’s an insurance policy that pays out when you die, which can provide your dependents and loved ones with financial resources to stay afloat—especially important if you were the primary earner in your family.
There are multiple types of life insurance, with two of the most popular being term life and whole life.
What’s term life insurance?
Term life insurance is a life insurance policy that offers a specific time period of protection, or for a set “term”. Most commonly, you can purchase policies that last for 5, 10, 20, or 30 years.
So, If you have a term life policy for 20 years and die within the 20 years, your beneficiaries will receive the payout from the term life policy. There are no restrictions on what your dependents can use the payout for, be it funeral costs, or day-to-day expenses.
Term life policies provide pure insurance protection, and are generally the more affordable option, with lower monthly premiums. However, term life policies do not accumulate in value and expire at the end of the term.
What’s whole life insurance?
Whole life insurance, on the other hand, provides a cash payout to your beneficiaries regardless of when you die. Or, it’s valid for your “whole life”, it helps to think of it that way. Whole life policy monthly premiums are typically more expensive than those of term life policies.
Many whole life policies accumulate cash value over time, assuming you pay your monthly premiums and carry the coverage. Whole life policies can act as an investment vehicle, as a result, and its value may grow tax-free and earn you dividends.
There are also certain tax advantages to choosing a whole life policy.
The key differences
While both term life and whole life insurance have some obvious similarities, here’s a rundown of some key differences:
- Term life policies are for set durations of time, or “terms”
- Whole life policies cover you for your entire lifetime
- Term life policies are generally less expensive
- Whole life policies accumulate cash value over time
- Whole life policies can pay out dividends
Which should you choose?
How should you decide between a term or whole life policy? The answer will depend on your particular situation and goals.
If you want to make sure your family is covered in the event of your death for a specific period of time, prefer lower premiums, then a term life policy may be a good choice. If you want life insurance with indefinite coverage for your entire lifetime, use your policy as an investment, and are comfortable with possibly higher fees, then a whole life policy may be a better choice for you.