Two of the most common types of life insurance are term and whole life insurance policies. Term life insurance offers coverage for a fixed length of time, whereas whole life policies guarantee coverage for the rest of the policyholder's life. To choose the right policy, people should do thorough research and compare each type of insurance plan's features and benefits. Here are four ways to compare term and whole life insurance policies so that policyholders can find out which plan can best meet their loved ones' needs.
Term life insurance only lasts for a set timeframe, and can work well for people who need temporary coverage. For instance, a couple that just had a child may get a term policy for 20 to 25 years to cover the period when the child is still a dependent.
On the other hand, whole life insurance lasts for the duration of the insured's lifetime. So, this type of policy might work best for people who have multiple beneficiaries they need to protect over their lifetime.
Cash value vs. no cash value
Whole life insurance policies have a growth component called the cash value. Part of each premium goes toward this cash value, which grows tax-deferred at a fixed interest rate.
A whole life policyholder can borrow against this cash value at a low rate with no credit checks when it's large enough and can pay back the loan at their leisure. They may also be able to withdraw from the cash value. Plus, the insured receives the cash value minus surrender charges if they surrender the policy before they die. Term life insurance policies, on the other hand, don't have a cash value component.
Whole life insurance policies come with more features than term life policies, but that also means they can be more complex. For instance, a policyholder may need to pay a surrender charge if they want to give up their policy. This means that prospective policyholders may need to spend extra time to understand the details of their whole life insurance plan. With term life policies, a policyholder can simply stop paying premiums if they no longer need their coverage.
Whole life policy premiums cost several times more than term policy premiums. The higher premiums are the trade-off for guaranteed lifetime coverage and the cash value component.
The bottom line
Term life insurance policies tend to be cheaper and simpler, but they don't cover the policyholder for life or allow them to build cash value. Whole life policies let the policyholder build wealth through the cash value and provide lifetime coverage, but at the cost of higher premiums and added complexity. So, the best kind of life insurance for someone depends on their circumstances and needs.
Someone who only needs coverage for a certain time period and wants to save money might be best suited for a term life insurance policy. Meanwhile, someone who has lifelong insurance needs and wants an additional wealth-building vehicle should consider getting whole life insurance. Regardless, any life insurance customer should do their research to ensure they get the coverage they need at a cost they can afford.