If you have a family and wish to protect it financially, life insurance can provide a comforting safety net. But choosing between whole life and term life insurance can be confusing. You'll need to compare carefully and evaluate before making a decision.
Term life insurance
Term life is basic coverage that pays out if you die within a specific time period. You choose the amount of coverage and the policy term ahead of time, and your payments and coverage are guaranteed to stay the same.
For example, a $100,000 policy with a term of 30 years would pay out that amount to your beneficiary or beneficiaries, should you die within the time frame. But if you die after the term ends, there's no payout.
Term lengths typically range from 10 to 30 years. You might be able to renew or purchase a new policy at the end of your term, but likely with a much higher premium, since you will be older and at a greater risk of dying.
Term life insurance tends to have less costly premiums than whole life, especially for the young and healthy.
Whole life insurance
With whole life insurance, you build up a cash value in a tax-sheltered account as you pay your fixed monthly premiums. There's also the potential to receive yearly, tax-free dividends from the insurance company, although dividends are not guaranteed and depend on the company's dividend policy.
The dividends can be left in the policy to accrue more interest, increasing your policy's cash value and death benefit. Dividends can also be used to pay the policy premium, or received in the form of a check, although this will depend on the insurance company.
You can access the cash value during the lifetime of your policy without taxes or penalty in the form of a policy loan. So whole life can provide a source of funds later in life if you need the money to pay college tuition, cover health-care expenses, buy a new home or supplement retirement income.
Just like any life insurance policy, your beneficiaries still get death benefits when you die, which is generally free from federal taxes, as long as your policy premiums are paid on time and you have no loans outstanding against your policy.
You can cash out a portion of the value of your whole life policy, but some of the withdrawal may be subject to taxation. You should be able to find the policy's cash value when you view your policy's statement, which usually shows you how much you can withdraw at a time.
How to choose between whole and term
Choosing between whole or term life insurance depends on your preferences, age and financial situation.
Term life often provides a relatively higher benefit at a lower cost. One reason is that term life insurance only covers you until the end of the term, whereas whole life covers your entire life. So if you die after your term life policy has ended, your beneficiary gets nothing, and expired policies have zero cash value.
Still, term life could be a better choice for someone who just wants protection for a certain period of time against the potential loss of the breadwinner in the family, at a more affordable cost, although your actual premiums will depend on your age and health.
Whole life insurance lets you accumulate a cash value to your policy and you can receive dividends, tax-free. You can also access the money in the form of a loan, tax-free and penalty-free, which makes the policy much more flexible than term life.
Whole life insurance also lasts your entire life, so you don't have to worry about dying after a term life policy has expired. On the downside, the premiums are typically higher than term life coverage.
By Gaurav Kadam