Many people wonder what’s the difference between whole and term life insurance, but it’s not that hard to understand. In this article, we’re going to break down the main differences between the two types of policies so that you can make an apt decision when buying insurance coverage for your family or yourself.
Whole life insurance is a permanent form of life insurance. It’s available in all 50 states and offers lifelong protection from death, dismemberment, terminal illness, accidental death and long-term disability. The premiums are typically higher than monthly term life insurance, but the costs are locked in for as long as you live.
Commonly called whole-life policies or cash value policies, they’re often referred to as “universal” or “endowment” policies because they combine coverage with savings options that build equity over time. As per Ethos experts, “Whole life insurance can last the rest of your life with a guaranteed payout for your loved ones.”
- The whole life insurance policy is a permanent financial instrument, while the term life insurance policy is temporary.
- Term policies are generally less expensive than whole-life policies and have higher premiums at the beginning of the policy period.
- A term policy has an end date and you can renew it for an additional cost if you want to continue your coverage or if you need more coverage in the future.
With a term life insurance policy, you can invest the money that’s been set aside for your death benefits at any time. You can put it in an account with the insurance company and earn interest on it, or you can have your money invested elsewhere—in stocks, bonds or other assets. If you choose to invest in stocks and bonds with your term life insurance money, there is a chance that you’ll lose some or all of what was invested if the market fluctuates unfavorably (as it does from time to time).
Term policies are also great if you’re unsure how long your family will need protection. They allow flexibility so that should another child be added to the mix down the road (or heaven forbid!), parents can adjust their coverage accordingly without having to go through another application process or purchase new policies altogether!
Liquidity and Policy Loans
Whole life insurance can be more difficult to liquidate than term life. Term life insurance policies usually have a higher cash value and thus have a lower interest rate on policy loans. Therefore, the tax-free death benefit of your whole life is not available for your beneficiaries until the end of the contract.
Term insurance has a shorter term and a cash value that allows you to borrow against it if necessary. Term life is simpler because there are no annual fees or charges associated with keeping it in place once you have paid off the premiums for 10 years or so.
Now you must have learned a lot about the differences between whole life insurance and term life insurance. There are many things to consider when choosing which type of policy is right for you and your family, but these two options should be at the top of your list. While some people may prefer term life because it’s cheaper than whole life, many other factors come into play when deciding which type of policy will work best for each individual’s needs.