Life insurance is one of the most important things you can buy. It ensures, should the worst happen to you, your family will not be left with a financial burden in the midst of your loss. The proceeds of a life insurance plan can be applied to everything from funeral costs or lingering health care bills to college tuition or mortgage payments. There are two main types of life insurance; Term Life and Permanent. Term Life is the simplest to understand and has the lowest prices, whereas Permanent (aka Whole Life) can get a bit more complex.
-Term Life Insurance
This is insurance that provides coverage for a set time frame. Some people also call it “pure life insurance”, as it’s purely in place to protect your dependents in the event of a premature death. If you die within the term of the policy, your beneficiaries would then receive the payout. However, this policy does not have any other value. The term is chosen when you buy the policy and is typically either for 10, 20, or 30 years. Most policies retain the same death benefit and premium throughout the term.
Important things to keep in mind when shopping for term life insurance:
- When choosing a term’s time range, make sure it lines up with the years you’ll be paying your family’s bills and will need life insurance coverage in case of your untimely demise.
- The total amount of the plan needs to be enough that it will be able to replace your income and assist in paying for services you provide now, like child care.
The ideal situation is for your family’s need for life insurance would conclude right around when the term ends. At this point, your children will be grown adults providing for themselves with their own insurance policies, your house will be fully paid off, and your savings account will have plenty of money stored away in the event of an emergency.
-Whole Life Insurance
While there are a few other types of permanent life insurance, whole life is by far the most common. Whole life is a very appropriate name for this type of insurance, as it provides coverage for your entire life with no term limits. Additionally, the investment component of the policy sets it apart from term life, as it has a cash value. That cash value acts similarly to a savings account, as it slowly grows and is tax-deferred, meaning you do not have to pay taxes on the gains it makes while it is growing.
Because of this cash value, you can borrow money against the policy or even surrender the policy outright for the cash value. If you borrow against the account and don’t repay these policy loans with interest, the death benefit of the policy will be reduced. Of course, if the policy is surrendered, you will lose your coverage.
While whole life insurance can get more complicated than term life, thanks to its investment component, much of it is incredibly straightforward. That’s because:
- Your premium will stay the same for your whole life
- The death benefit amount is guaranteed for your whole life
- The cash value of the policy grows at a continual and guaranteed rate
Depending on the insurer you choose, a whole life policy can earn dividends annually, which is a portion of the insurer’s financial surplus. Those dividends can be given in cash, deposited into the account to gain interest, or be used to lower your monthly premium, repay any policy loans you may have taken out, or even to buy additional coverage. It’s important to note that dividends, while nice, are not guaranteed.
We won’t be going in-depth regarding actual numbers since the pricing of policies varies depending on many different factors such as your age, gender, and health. A direct comparison between the two types of plans is nearly impossible. However, we can get into some of the broad stroke differences between the policies.
The number one reason term life is able to have lower pricing is that it is, by its very nature, temporary. It also carries no cash value and it will only be paid out if you die within the term. Whole life insurance costs more because the coverage doesn’t expire and has a cash value with an investment rate that is guaranteed based on a portion of what you pay into it.
We hope you’ll find this information helpful as a way to narrow down your choice and maybe develop some questions of your own based on your family’s needs. For some more help determining whether term or whole life insurance is right for you, we recommend you call one of our life insurance experts at Midgard Life Insurance Services. They have the know-how to help you make the best decision for you and your family.