Life insurance has one main purpose: to pay a sum of money, known as a “death benefit” to your dependents if you die. That means that, if you die suddenly or become terminally ill, your family will still be able to pay for things like food, mortgage or rent, car payment, and childcare costs after you die. And while planning for your death seems morbid, it’s truly smart because not doing so could leave your family in a lot of financial trouble if you’re involved in a fatal accident.
Deciding that you need life insurance is only the first step. Before signing up for a policy, you’ll need to determine the best kind that fits your needs. There are several different types of life insurance available, but the most common two are called term and whole life insurance.
What is term life insurance?
Term life insurance lasts for an agreed-upon period of time, or a “term” (hence the name). The term is something you determine with the insurer when you take out the policy. During that term, your beneficiaries will receive a guaranteed death benefit if you die, but after the term is up they won’t receive any money.
Generally, you would take out term life insurance if you want to help cover living expenses for your family in the event of your death. Regular expenses like your mortgage and childcare could be hard for your family to cover without your income, so term life insurance can help if tragedy strikes.
The length of the term you choose is up to you, but ideally it would last until you are at retirement age, have paid off your mortgage and other debts, and your children have left home. That might mean a term of 15, 20, or 30 years, with the most common term being 20 years.
What is whole life insurance?
Whole life insurance is permanent and designed to cover you from the time you take it out until the time you die. There is no end date like there is with term life insurance. Whether you die in an accident in your 30s or of old age in your 90s, whole life insurance guarantees a death benefit to your beneficiaries.
Whole life insurance is also a form of investment. In addition to the death benefit, whole life insurance has what’s called a “cash value,” which is like a tax-free savings account that grows over your lifetime. When you pay your monthly premium, some of it will go into the cash value, and that money will be available if and when you need it for retirement, a financial emergency, or even in place of a traditional loan.
The cash value piece of whole life insurance is guaranteed to have a minimum growth rate. Some investors choose this instead of (or in addition to) traditional investment opportunities in order to maximize their retirement savings, or to provide money in a trust for a dependent when they die.
What does each cost?
Since whole life insurance covers you for longer than term insurance and has a guaranteed cash value, it’s the more expensive option. But what does that look like for your wallet? Here’s a table showing the monthly premium for each type of insurance, dependent on age.
|Age||Term life insurance - 20 years||Whole life insurance|
*This information is provided by Policygenius, utilizing data from 11 partner life insurance companies. Quotes are for a male non-smoker living in Columbus, Ohio.
The main differences between term and whole life insurance are cost and policy term. But there are plenty of other differences to take into account when deciding which is right for you. Here’s a look at how term life insurance stacks up against whole life insurance when it comes to features.
|Feature||Term life insurance||Whole life insurance|
|Cash value||Not available||Guaranteed|
Pros and cons of each
Just like everything, term and whole life insurance each have their pros and cons. It’s smart to consider both before choosing the type of life insurance you take out to make sure you’re picking the best one for your situation.
Term life insurance
|Cheaper premiums||Coverage is temporary|
|Ability to cancel policy without losing value||Must re-qualify to sign up for new term|
|Can convert to whole life insurance policy, depending on policy rules||Preexisting health conditions can make it harder to qualify|
|No cash value|
Whole life insurance
|Coverage is permanent||More expensive premiums|
|Comes with tax-deferred cash value||Death benefit is typically smaller than with term life insurance|
|Can provide for long-term dependents after you die||Can’t control where your money is invested|
Other types of life insurance
In addition to term and whole life insurance, there are also several other types of life insurance to consider.
Universal life insurance
Just like whole life insurance, universal life insurance is permanent and lasts until you die, providing a guaranteed death benefit for your family. But unlike whole life insurance, universal life allows you to increase or decrease the death benefit, which means you can raise or lower your premiums. With Whole Life, your death benefit and premiums stay the same.
Universal life also offers the same cash value portion that whole life insurance does.
Variable life insurance
Variable life insurance also has a death benefit plus an investment component. Unlike whole life insurance, with variable life you can have control over where your money is invested. But with Whole Life, the insurance company makes those choices on your behalf. So if you're comfortable with investing, variable life might be a better option.
Variable-universal life insurance
Variable-universal life insurance is exactly as it sounds: a mix of variable and universal life insurance. You can increase or decrease your premiums and death benefit, and you can also control where your money is invested in the savings portion.
How to choose the right life insurance policy
Once you understand the difference between the two main types of life insurance, it should make your decision a little easier. Are you the breadwinner for a family with young kids and a stay-at-home co-parent? Term life insurance might be all you need. Do you have a disabled dependent that will require financial support even as an adult? Whole life insurance can help make sure they are covered after you pass away.
Your decision might also be dependent on cost. It’s a good idea to shop around and do a price comparison at several different insurance agencies and online providers such as Fabric or Bestow to make sure you’re getting the best rate for the insurance type you choose.
Life insurance is good to have if anyone in your life depends on your income to survive. The type of life insurance you choose will depend on many factors, including how much you can afford for premiums, how long you want to be covered, and whether you want to combine your policy with an investment account.
The most important thing is to take action and sign up for a policy now so that your family is covered in the event of your untimely death. Don’t put off something that can have such a huge effect on your family’s financial future!