Life insurance pays a death benefit to the insured’s loved ones, which can help replace income or pay off debt when the insured dies. Originally designed to help cover burial costs and provide care for widows and orphans, life insurance is now a flexible and powerful financial product.
Life insurance is a contract between the insured and an insurance company. In exchange for regular premium payments to the life insurance company, the company agrees to pay a death benefit to the insured’s beneficiaries when they die. Typically, there are two types of life insurance policies: term life and whole life policies.
The two primary differences between term and whole life insurance are cost and length. Term life insurance is less expensive than whole life, but only provides coverage for a set period of time. Whereas whole life insurance lasts the insureds entire life if they continue to pay the premium.
How to Choose Between Term and Whole Life Insurance
Term life insurance is sufficient for most families, but whole life and other forms of permanent coverage can be useful in certain situations.
Choose term life if you:
- Only want life insurance to cover a short-term need. A term life policy can replace your income if you die while you still have major financial obligations such as raising children or paying off a mortgage.
- Want the most affordable coverage. Term life insurance is the least expensive option, especially when you are young and healthy.
- Think you might want permanent life insurance but cannot afford it right now. Many term life policies can be converted to permanent coverage. The deadline for conversion varies by policy.
- Do not want to use life insurance as an investment vehicle. Buying a cheaper term life policy lets you save what you would have paid for a while life policy, and perhaps invest the money elsewhere.
Choose whole life if you:
- Can comfortably afford the higher premiums. Whole life insurance is a lifelong commitment, so you want to make sure you can afford it. If you miss your premium payments, your policy could lapse.
- Want to leave money for your heirs. Because the death benefit pays out regardless of when you die, you can use it as an inheritance. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate.
- Have a lifelong dependent like a child with disabilities. Life insurance can fund a trust to provide care for your child after you are gone. Consult with an attorney and financial advisor before setting up a trust.
- Want life insurance that builds guaranteed cash value. The cash value of whole life policies grow at a guaranteed rate set by the insurer.
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