Confused about the difference between whole life insurance and term life insurance? You’re not alone; people often struggle to choose which is right for them, and sometimes even switch from one to the other. Before you make that choice, make sure you know what’s what.
Whole life insurance
- Tends to be more expensive than term life insurance.
- It incorporates a cash value element (which contributes to the higher cost) that you don’t get with term life insurance. What this means is that as you pay insurance premiums, some of what you pay is available to borrow against or cash out during your lifetime.
- Because they’re designed to provide stability, they became popular after the financial crisis in 2008 to 2009.
- You can withdraw most or all of what you put into it tax-free, but:
- You must follow strict rules associated with payments and if you don’t, you can end up owing a lot in taxes.
- Whole life insurance offers level premiums and life insurance protection for life (but again, as long as the premiums are paid as your insurance requires).
- When you buy whole life insurance, your insurer deposits your premium (minus insurance costs and other expenses) into a cash value account.
- For that reason, whole life insurance can provide the accumulation of cash value (tax-deferred), and you can use it when you need it.
- Whole life insurance comes in three types: traditional, variable and universal.
- Sometimes people underestimate how much the payments will be, and they switch to term life insurance.
Term life insurance
- Term life insurance is simpler and works like your car or home insurance.
- With term life insurance, you pay premiums either every month or every year, and your family is protected for that term — for example, 20 years.
- According to State Farm, common uses for term life insurance are: helping provide for a family’s loss of income, covering short-term debts and needs, providing additional insurance protection during the child-raising years, providing longer-term protection to help pay off a mortgage, or to help pay for a college education.
- Term life insurance can be bought for periods of one to 30 years.
- Term life policies tend to be fairly cheap for healthy people under 50, then get progressively more expensive.
- The main difference between term life insurance and whole life insurance is with term life insurance, when the insured person dies, it just pays the face amount of the policy to the named beneficiary.
Variations on term life insurance
- So called return of premium term life insurance will return some of your premiums at the end of the term. These policies are generally more expensive.
Which is right for you?
For most young people, we recommend basic term life insurance. It’s straightforward and inexpensive, leaving you more money leftover to invest for retirement and other goals. In some cases, if you’re looking for insurance that provides tax benefits and — after a certain amount of time — a guaranteed return on money you’ve paid in, you might consider a whole life insurance policy. We recommend, however, that you only buy whole life insurance after consulting an independent financial planner or estate planning attorney.