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Think of term life insurance like a subscription. You buy a certain amount of coverage for a set period of time (your term) and pay an insurance company a flat-rate premium every month. This guarantees that your beneficiaries would receive a lump-sum payout (known as the “death benefit”) if you passed away during your term. Term is a simple and straightforward form of life insurance, with more affordable monthly premiums than whole life.
Whole life insurance covers you for your whole life as long as you continue to pay your premiums. A payout is guaranteed at the time of death for your policy’s beneficiaries (again, as long as the premiums are paid). Some of the money paid into the policy builds “cash value” which may increase the death benefit or be accessed on a tax-free basis with a policy loan. Due to the duration of the coverage, premiums for whole life insurance are typically more expensive.
Term premiums typically cost 8-15X less than permanent life insurance. If affordability is a major sticking point, term is probably your best bet.
It’s simple—pay the monthly premiums and get coverage. If you pass away during your term, a death benefit will be paid to your beneficiaries.
You can choose your preferred term length and get coverage when you need it most. Whether you want to be covered until you pay off your mortgage, put the kids through school, or reach retirement—it’s totally up to you.
With whole life insurance, part of the premiums you pay go towards building up cash value, which also earns interest. Depending on the type of policy features, you may be able to withdraw or borrow the cash value that has accumulated in the policy.
Your premiums will likely remain level from the time of purchase until the end of your payment period.
As long as you keep up with premiums, this coverage will last your whole life. When you make payments according to the policy requirements, the coverage will remain in force.
Since these types of insurance are so different, it’s difficult to make an apples-to-apples price comparison. Term life insurance is more affordable than whole life due to the fixed amount of coverage and the lack of cash value accumulation. Whole life insurance has higher premiums due to the cash value component and the lifetime coverage. Both types of insurance will pay a death benefit as long as the premiums are paid and the policy is in force.
Who term is best for:
- You need a policy to replace your income over a specified period of time (like raising children or paying off a mortgage)
- You need a policy to cover short-term financial responsibilities such as a loan or credit card debt
- You need additional insurance coverage temporarily, such as during child-raising years or starting a business
- You want the most affordable coverage
Who whole life is best for:
- You want a policy to last your lifetime, which can be used for legacy planning or to help cover your final expenses
- You want a policy that builds cash value over time
- You’re at or nearing retirement age
Universal life insurance: Universal life insurance is a type of permanent insurance. A unique feature of universal life insurance is that the policy owner can choose to adjust the premiums paid, as long as the minimums to maintain the insurance are made. If the owner chooses to pay more than the minimum premiums, the cash value and death benefit can increase.
Indexed universal life insurance: An indexed universal life insurance policy offers the policy owner an option to participate in indexed accounts, where the profit and losses of the account are tied to a specific index, like the S&P 500.
Variable life insurance: A variable policy can have market exposure through the insurance company’s separate account. The separate account is typically managed by experts within the insurance company, where the funds allocated to the separate account options are managed at an aggregate level. Depending on the risk tolerance of the policy owner, a policy can realize gains and losses in investment options with portfolios composed of fixed accounts, money market funds, bonds, mutual funds, and/or stock options.