Term vs. Whole Life Insurance: What’s the Difference?
If you're wondering about term vs. whole life insurance definitions, don't worry -- you're not alone! Many people are unsure of the difference between term and whole life insurance and what each type of policy entails. In order to figure out if you should buy term or whole life insurance, you'll first need to understand the differences between the two.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that provides coverage for your entire life. Whole life insurance policies do not expire, as long as you continue to pay the premiums. Whole life insurance also has a cash value component, which grows over time and can be borrowed against or used to pay premiums, if needed.
How does the cash value portion of whole life insurance work?
The cash value of a whole life insurance policy is the "savings portion" which accompanies the death benefit. This savings portion grows over time as interest accumulates. In order to build up the cash value portion, the policyholder can reinvest any policy dividends back into the policy, helping it grow over time.
Policy dividends are payments that the life insurance policy holder can get from their life insurance company every year. The dividend amount depends on the policy’s value as it’s a percentage of the value. The percentage changes every year, depending on the insurance company’s performance. The policyholder is able to use this savings portion as a living benefit, meaning they can request a withdrawal from the policy or they can request a loan. Any unpaid loans reduce the death benefit amount if they are still unpaid at the time of death.
What is term life insurance?
Term life insurance is a type of temporary life insurance that provides coverage for a specific period of time, typically 10, 15, or 20 years. Term life insurance policies do not have a cash value component and will expire at the end of the term if the policyholder does not renew it. If the policyholder renews it, they can renew it for another set term or they can convert the policy into a permanent coverage (instead of only for a specific period of time).
Term insurance policies are typically based on the payout amount (the value of the policy), the insured's health, gender, and age. Some insurance companies require additional information to determine the policy cost (such as smoking status, occupation, driving record, etc.).
If you purchase a term life insurance policy and die during the policy term, the insurance company will payout to your beneficiaries. This benefit is typically not taxable and can be used by your beneficiaries to cover final expenses, such as funeral costs and any outstanding debts or mortgage payments. If you do not die during the term of the policy, the insurance company keeps the premiums that you have paid. There is no benefit paid out and the coverage expires at the end of the term. Term life insurance policies do not provide a cash value other than the death benefit that is only paid out if the policyholder dies during the policy term.
Term or whole life insurance: key differences
There are a few key differences between term and whole life insurance. One is that whole life insurance has a cash value component, while term does not. This means that with whole life insurance, you are paying into a policy that you can later access for other purposes, like retirement income. Term life insurance, on the other hand, is designed to simply provide coverage for a set period of time. Another key difference is that whole life insurance premiums are generally more expensive than term life insurance premiums. This is because whole life insurance covers you for your entire life, while term life insurance only covers you for a set period of time.
Whole life insurance also has different tax benefits than term life insurance. With whole life insurance, the cash value grows tax-deferred. This means that you don’t have to pay taxes on the growth of the cash value until you withdraw it. With term life insurance, there are no tax benefits because there is no cash value component.
So, which is better - term or whole life insurance? The answer depends on your specific needs and financial situation. If you need coverage for a specific period of time, like when you have young children at home, then term life insurance may be the best option. If you are looking for a policy that will cover you for your entire life and also provide a cash value that you can access later on, then whole life insurance may be the better choice.
It also helps to research term life insurance quotes vs. whole life insurance quotes and figure out what makes sense financially for you. No matter which type of life insurance you choose, it’s important to make sure that you have enough coverage to protect your loved ones in case of your death. Talk to an insurance agent to figure out how much coverage you need and to get term life insurance quotes or whole life insurance quotes.