Deciding on life insurance by comparing term policies vs. whole life is a wise way to put thought into your financial legacy. When the inevitable happens, having an active life insurance policy can give your family peace of mind and a sense of safety when they need it the most.
What Are Term Life Insurance Policies?
There are many life insurance options, and term life insurance policies are the most popular. They are valid for a period of time — a term — that's usually between 20 and 30 years. Once the specified period is over, the policy expires. People usually get this type of insurance for the death benefit.
For many, term life insurance is a way to ensure their dependents are taken care of in the event of their death. Families can use the money to pay off their mortgages or secure themselves to ensure they're taken care of once their loved one passes.
Advantages of Term Life Insurance
The main difference between term life and whole life insurance is that term insurance is typically more affordable because it has a finite duration. It's ideal for people who are looking to protect their family when they pass and not searching for any other kind of investment from their life insurance policy.
Most term policies last until your child enters adulthood, which makes them especially popular among single parents. They provide a safety net to protect the child in their most vulnerable years. Some options may not require a medical exam.
The cost margin for life insurance term policies vs. whole life options is quite wide. Term insurance has no cash value and can only be used when the holder passes. Generally, the shorter the period and the younger you are, the lower the premium will be. However, some term policies have the option of allowing you to convert them to whole life policies at an extra cost.
Disadvantages of Term Life Insurance
A key difference between term life insurance and permanent is that term insurance expires. You could have spent a large sum of money for peace of mind and nothing more. You can't use the money for other investments or gain tax benefits like you can with other insurance options.
Many term life insurance policies require medical exams, so if you have health issues, your premiums could be higher. Additionally, by the time your term life insurance expires, it might cost you more to get a whole life insurance policy.
Should You Get Term Life Insurance?
Is term insurance the right choice for you? If the following statements apply to you, then it might be a perfect fit:
- You want affordable coverage that fits into your budget comfortably.
- You're looking for something to supplement your whole life policy.
- You're not necessarily looking for lifelong coverage.
- You're looking for a whole life policy later on in your life.
What Are Whole Life Insurance Policies?
Whole life Insurance is a permanent option that doesn't expire as long as you keep up with your premiums. It provides a death benefit and cash value, allowing you to use it as an investment as well.
When you pass away, your beneficiaries will receive the total death benefit payout, which is the same with whole or term life insurance. Whole insurance also has a savings component that increases in cash value over time. You can use this to pay your premiums or borrow against it.
Advantages of Whole Life Insurance
Most whole life policies have level premiums, which means the monthly rate doesn't change throughout the policy. Each payment is split in three ways, One portion of your premium goes toward the death benefit, another goes toward the insurer's costs and profits, and the third contributes to the policy's cash value.
Once your cash value accrues, you can withdraw it. You also don't necessarily have to pay it back, which may be a promising proposition for some. The ability to withdraw money makes it a better financial tool for flexibility.
Some whole life policies also offer a guaranteed interest rate, making them a secure investment. Other options include participating policies that pay off dividends that could increase your earnings, but they’re not guaranteed.
Disadvantages of Whole Life Insurance
If you choose the cash value of your whole life policy and don't pay it back, the amount will be deducted from your death benefit. The cash benefit kicks in within two to five years.
One downside of a whole life policy is that the death benefit payout and cash value don’t work separately. In other words, the amount you take out of your policy will correspond with the loss reflected in your death benefit. For instance, let's say you take $20,000 out of the account. If you pass away, your beneficiaries will receive $20,000 less of the total amount of your death benefit.
One key life insurance difference between whole life and term life insurance policies is that whole life policies are significantly pricier. There may also be a surrender charge should you choose to cancel your policy early. However, the surrender charge amount shrinks over time.
Should You Get Whole Life Insurance?
Whole life insurance has its perks for the right policyholder. You should consider getting this type of policy if you relate to the following statements:
- You need lifelong coverage.
- You’re younger and may outlive the duration of a typical term policy.
- You’re looking for a policy that also provides a cash value.
What’s Better, Term or Whole Life Insurance?
One of the questions to ask yourself before buying life insurance is whether term or whole life insurance is what's better for you. Both whole and term life insurance have pros and cons, so it depends on your unique circumstances and aims.
If you need life insurance for only a set period of time, like when you’re raising your children, a term life policy will be a better option. It’s also a prime choice when you’re on a tight budget and need a more affordable option.
A whole life policy is better if you’re looking for a policy that’ll last your entire life. It’s especially beneficial for younger people who may outlive the typical duration of term life insurance.
A whole life policy is also a better option for those looking for a policy that has cash value and won’t expire. Investing in a term policy could be considered a waste of money if it expires before it pays out. So, if you have the budget for it and want something more permanent, then a whole life policy is the best option.
A recent survey found that 66% of Americans worry about their family's finances should they pass away. So, you should get whole or term life insurance. Any policy is better than no policy, so if term is all you can afford, it's definitely the better option.
Some people may have unique needs that sway towards one of the two policies. For instance, parents of children with disabilities may prefer a whole life policy. It lasts as long as the premiums are paid, so even if they pass away when their children are adults, it’ll pay out.
If you find a good insurance company, check if they have renters insurance or travel accident insurance so you can secure other important areas of your life.
Get Your Most Valuable Asset Insured With AAA Life Insurance Company
Pick from versatile insurance options from AAA. We have term policies, whole life options and more, so you'll find something that suits your budget, needs and preferences.
Our membership services offer a range of benefits, from 24/7 roadside assistance to travel packages and discounts. We pride ourselves on being there for our members when they need us most.
Contact us to get a quote or speak with an insurance agent to insure your most valuable asset — your life.
