Purchasing life insurance is an individualized process. The type of coverage you should invest in really depends on what you want it to be able to cover when you’re gone.
For some people, they want just enough coverage to take care of any funeral and burial costs so that their loved ones aren’t stuck with the expense. Other people want to ensure that those they leave behind are taken care of financially.
Your goals also affect whether you should buy a whole or a term life insurance plan. If you’re not sure which one is for you, use this breakdown to help you make a decision.
What’s the Difference Between Term and Whole Life Insurance?
When you start researching life insurance, you’re going to find two main categories: term and whole.
Before you look any further, let’s break down what each one means:
- Term life insurance is, as the name implies, only in effect for a certain amount of time. Because of this, it’s usually cheaper.
- Whole life insurance, on the other hand, costs more but has extra perks. It’s good for your “whole” life. This insurance comes in multiple forms and can get complicated.
With those definitions in mind, here’s a little more to clarify the difference in these two insurances.
- The coverage periods differ. Term life coverage is typically offered in 10 – 30-year policies. Applicants can be screened for approval until age 90, 95, 100, 105, 110, or 121.
Whole life, on the other hand, nets you a policy premium that stays consistent until you die, or until age 100 or 121.
- Your premiums will vary. Term life insurance often has lower monthly premiums. This is because you’re paying for the insurance, whether you use it or not. At the end of the policy term, coverage ends.
With whole life insurance, you will likely pay double the term rates or more, but you’re paying for an investment value with your premium. Your policy will accumulate a cash value the longer you keep it.
- You may be eligible for dividends with whole life coverage. Dividends are paid to stockholders when a large company has an excess of profit at the end of the year. If your whole life insurance policy makes you a stockholder in the company, you may receive dividends on top of your benefits.
Term life insurance policies are not eligible for dividends.
- Term can sometimes convert to whole. Many people get term life insurance because they think they can’t afford the premiums for whole life coverage. Term is good protection for people who want to make sure their mortgage or car is covered after they’re gone.
If you’re looking for affordable coverage, term may be the solution. However, some of those policies can be converted to whole life insurance before a set deadline if you change your mind.
- Whole life insurance can be used as a trust. If you have an estate that may not be sustainable by your heirs, you can use a life insurance policy to help them. Similarly, if you have a special needs dependent who needs care after you’re gone, you can work with an attorney to ensure your policy provides this coverage for them.
Whole or Term: The Choice is Yours
Everyone’s needs are different, so it’s up to you to decide which coverage you need. The only guarantee is that you’ll need one or the other, and the sooner you get it, the lower your premiums will be.