Term vs. whole life insurance: which is best for you?

Key takeaways:

• If you need life insurance, it’s important to choose the right kind of policy. Term and whole life insurance are two of the most common options, but they are very different in how they work.
• Term life is less expensive; whole life has an investment component that may work for some people.
• A good insurance broker can help you evaluate the life insurance options and prices to find the best fit for you.

Not everyone needs life insurance, but if you do, it’s important to choose the right option for your situation.

The two most common types of life insurance are term life and whole life. While both are designed to help you take care of the people who count on you for financial support after you die, the two types of policies work very differently.

Term life insurance

Term life insurance provides coverage for a set length of time, called the term, which is usually between 10 and 30 years. If you die during that period, then your beneficiaries can make a claim to receive the death benefit. Your annual premiums stay the same throughout the entire term.

Term life insurance has no cash value—there is no payout unless the person who is insured dies during the policy term.

Term life insurance is less expensive than other life policies, especially if you’re younger. This makes term life a great option if you don’t think you’ll need insurance when the current policy expires. However, if you think you’ll eventually need to renew the policy, it will be more expensive since premiums are partially dependent on your age. For example, premiums for a 20-year term life policy are much lower for a 30-year-old than they are for someone in their 60s.

Pros

• Simple, straightforward
• Annual premiums remain the same for the entire term
• More affordable than whole life insurance
• Can be canceled at any time with no penalty

Cons

• Coverage expires when you reach the end of the term, which means you’ll have to shop for a new policy if you still need life insurance
• Coverage becomes more expensive as you get older, leaving you with higher annual premiums if you want to renew the policy

Whole life insurance

With whole life insurance, your premium payments stay constant throughout the life of the policy, regardless of your age. This means whole life insurance is just that—coverage for your entire life. Whole life is more expensive than term life because it has a longer coverage period, and because there is often an investment component in addition to the insurance.

If your policy includes a cash value component, a certain portion of your premium goes towards the cash value of the policy each month, which grows over time like a savings account. You can borrow money from the cash you’ve saved, make withdrawals for retirement, or even use it to pay your policy premiums.

When you die, the policy pays your beneficiaries a guaranteed death benefit plus the cash value, which was invested to grow at a guaranteed rate of return. Because it serves as both insurance and investment, whole life is a more expensive life insurance option.

Not all whole life policies include a cash value. Check with your broker to understand your options.

Pros

• Doesn’t expire; coverage is for your whole life
• Since it earns tax-deferred interest, whole life policies with a cash value component may be helpful for estate planning
• Can provide savings in addition to insurance coverage

Cons

• More complicated
• Higher annual premiums than term life insurance
• Other forms of investments offer better interest rates
• Cancelation penalties may apply

Term vs. whole life insurance comparison

Source: https://www.policygenius.com/life-insurance/learn/whole-life-versus-term-life-insurance/

How do I choose the best life insurance policy for me and my family?

Choosing the right policy is dependent on your age, how many years you think you need coverage, your current financial situation, and your expected future income and need for insurance. The best way to know for sure that you’re choosing the right policy is to check with an insurance broker.

An insurance broker will work with you to help determine the best option for you.