Maybe youve heard the adage, life insurance isnt for you, its for your loved ones. In the event something does happen to you, you want to take care of your familys needs. Simple enough. And smart. But deciding how best to provide for your family will likely lead you to the term life insurance or whole life insurance fork in the road.
At first glance, the paths will look quite different:
Term life insurance is the more straight-forward of the two solutions and less expensive. Whole life insurance (the most common form of cash value or permanent life insurance), on the other hand, offers additional benefits but costs more than term life insurance.
So, the key to deciding your direction in life insurance requires anticipating future financial outcomes most beneficial to your dependents. You will want to cover key expenses and plan as if they wouldnt have your income.
To navigate that path, lets examine the differences between term life insurance and whole life insurance and the benefits of each.
What Term Life Insurance Provides
Simply put, term life insurance is much like your basic home insurance policy in its coverage. If damage occurs to your home, you receive a payout equal to the cost to restore your home. In the event of complete loss, its the face amount of the policy.
Term life insurance does the same but for your livelihood. If the insured dies, it pays out the face amount of the policy.
One key difference: the term or length of time the policy is in effect. And thats why its called term life insurance. Term life insurance is often sold in 10, 15, 20, 25 and 30 year policies. You decide the length of the policy. When the time period elapses — or the term expires — so does the insurance coverage.
Thats it. Term life insurance doesnt offer any savings or investment earnings at the end of the policy.
Why Select Term Life Insurance
Many people select term life insurance because it doesnt pretend to be anything else. Its simply insurance in its most essential form.
As a result, term life insurance costs less than whole life insurance. As much as 10 times less. For people with uncomplicated financial situations walking the term life insurance path can be the right call.
And with that simplicity, come a few drawbacks. First, a policy may allow you to convert to a whole life policy, but the premiums will go up. Second, know that once your term period is up, you can renew but the premiums will increase.
So, choose your term wisely. Consider the following when deciding on a term life insurance policy:
- What happens if you die unexpectedly? Will the policy coverage be able to provide for your family, replacing your income and covering day-to-day expenses? Also think through other expenses, such as child care, that could become the new norm for your family.
- Select a term and an amount required to cover major expenses and bills. Consider setting a term that expires once youve achieved some major financial life events, such as paying off your mortgage or ushering your adult kids onto their own path of financial independence.
What Whole Life Insurance Provides
Whole life insurance is essentially term life insurance combined with a mandatory savings program. The term, in this case, is not a set number of years, but your entire life.
The savings program is known as the policys cash value. At the end of policy, i.e. upon the insureds death, the value of the savings program portion is paid out to the policys beneficiaries.
Whole life insurance cash value behaves like a retirement savings program taking a long-term, risk-measured view to growth. Earnings also grow tax-deferred, so you wont pay taxes unless you cash out the policy or beneficiaries receive a distribution.
The Benefits of Whole Life Insurance
Many financial experts like to advise, Buy term and invest the difference. The prevailing wisdom is that in lieu of buying a whole life insurance policy with the cash value component, simply buy term life insurance and invest the difference of the whole life insurance expense and put it in the stock market.
Remember, term life insurance is less expensive. A financial expert might suggest you take the difference in what youve saved and max out your 401(k) or your IRA.
Still, whole life insurance has its advantages. It simultaneously provides a stability and flexibility that might benefit specific situations.
While some financial advisors argue for investing in the stock market, the money in a cash value account grows at a guaranteed rate. Furthermore, you can borrow money from the account or give up the policy for the account value.
Note: You want to look to those options only in an emergency. Taking a loan could reduce your death benefit. And closing your policy leaves you without coverage. Still, many people like to know they have an automatic way to create an emergency account, if ever needed.
Whole life insurance coverage also might be the right decision in a couple other scenarios.
If you have a dependent with special needs or who would otherwise require lifelong care, whole life insurance can help fund trusts designed to fund those needs.
And, finally, say you want to help your heirs with financial considerations upon your death. Cash value can help cover such items as paying estate taxes or leaving an inheritance.
Get Help With Your Life Insurance Needs
The primary intent of life insurance is to cover costs after youve gone. But determining what those costs would be is critical in figuring out whether term life insurance or whole life insurance will provide the benefits you and your family need.
To learn more about different life insurance plan policies and the coverage that best meets your needs, contact a SelectQuote licensed agent.