Choosing the Right Type of Life Insurance: Whole vs. Term
Choosing the Right Type of Life Insurance: Whole vs. Term
While choosing life insurance may seem daunting, you have two basic options – either whole life or term life. Both options have pros and cons and could be suitable for you depending on your situation. Determining which type of life insurance is the best fit for you means that you’ll first need to understand the difference between whole and term life insurance, and then the pros and cons of each type of life insurance.
Term Life Insurance
Term life insurance is a type of life insurance in which the insurance company promises to repay a set amount at the death of the insured. The payment to the beneficiary may be a lump sum of the death benefits or an installment of monthly benefits.
There are two types of term life insurance – level term life insurance and decreasing term life insurance.
Level Term Life Insurance
With level-term life insurance, the insurer will pay the death benefit amount and other promised benefits for the entire length of the policy.
Decreasing Term Life Insurance
There is decreasing term life insurance and this type of term life insurance has a decreasing death benefit. This means the insurer will only pay the death benefit amount that is specified in the policy at the beginning of the policy term. If the insured lives longer, the death benefit amount will decrease by the amount of each monthly payment.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance in which the policyholder pays fixed premiums for the entire life. The insurance company promises to pay the death benefits until the end of the insured’s life regardless of the changes in health, age, and occupation.
There are two types of whole life insurance – level premium whole life insurance and decreasing premium whole life insurance.
Level Premium Whole Life Insurance
With level premium whole life insurance, there are fixed premiums for the entire life of the policyholder. The death benefit amount, however, is dependent on when the policyholder stops paying premiums.
Whole Life Insurance with Decreasing Premiums
This type of whole life insurance has decreasing premiums for the entire life of the policyholder.
Which Type of Life Insurance is Better?
There is no single type of life insurance that is better than the other. Depending on your situation and needs, you could be better off with term life insurance or whole life insurance. The following are factors to consider when choosing between term life insurance and whole life insurance.
- Age: If you are young, you may not have a high enough death benefit amount to cover the financial needs of your family. This is especially true if you have a young family with children. A term life insurance policy at a younger age could be helpful in covering the cost of their education.
- Length of Time Needed: Long-term financial needs, such as a mortgage, may require you to buy a permanent life insurance policy. However, you may also want to buy a term life insurance policy on top of this to be sure that your family is adequately provided for in the event of your death.
- Availability of Coverage: Some occupations only offer term life insurance policies. If you are in one of these occupations, you may only have the option of purchasing a term life insurance policy.
Life Insurance Pros and Cons
- Cost: Term life insurance policies are less expensive than whole life insurance policies. This means that you might find a term life insurance policy that covers all of your needs without breaking the bank.
- Flexibility: There is more flexibility with term life insurance since you can cancel the policy at any time without incurring any penalties. This could be helpful if you need to lower your premiums or cancel the policy due to financial reasons.
- Guaranteed Coverage: Term life insurance policies comes with a guaranteed death benefit. This is because you are only paying for the time period specified in the policy. On the other hand, whole-life insurance offers guaranteed coverage even when you get older and your health changes.
Conclusion
Whole life insurance and term life insurance are two basic types of life insurance policies. Term life insurance is a short-term policy that covers you for a specific period of time. Whole life insurance is a long-term policy that covers you for your entire life. You should consider your age, the length of time needed, and the cost of coverage when choosing between term life insurance and whole life insurance.