Term vs. whole life insurance: Which one is for you?

Life insurance is not the most pleasant of topics to consider. Who wants to think about what happens to our loved ones after we’re gone? But, taking just a little bit of time and thought can bring you peace of mind, knowing you’ve done everything you can to protect your family (and never think about it again, of course!).

However, life insurance isn’t a one-size-fits-all policy — there’s a lot to consider, and much of it depends on, well, who depends on you. There are two main kinds of life insurance — term and whole — that we’ll break down to help you determine the coverage that’s right for you.

What is life insurance?

First, life insurance, in short, is meant to replace your income in case the unexpected happens and you can’t support your family or loved ones. Life insurance comes in many forms, and you can choose plans based on how you want your loved ones to be cared for in the event of a death.

Here are some benefits to consider for different life stages:

• Single: Pay off any debts behind like student loans, car payments, or other debts, so you don’t leave them behind for your loved ones.

• Homeowner: Pay off your mortgage and related expenses, and provide both shelter and income for any dependents. 

• Couple: Replace income, pay your share of debts or settlements, and leave more for the one you love. 

• Family: Provide for your children’s education costs, pay off loans, and leave a nest egg behind.

• Business owner: Help facilitate a partner buyout and/or cover any outstanding debts or expenses. 

Who are beneficiaries?

When you purchase life insurance, you’ll be asked to name people as beneficiaries. In the event that you die while covered by life insurance, your beneficiaries will receive money from your life insurance policy.

This is designed to help cover funeral expenses, pay off your debts, and ease the financial burden of your loss.

What's the difference: Term life insurance and whole life insurance? Which should you get?

There are two major types of life insurance — term and whole life policies. Term life insurance covers you for a certain period of time (usually between 10 and 30 years), while whole life insurance policies are good for the entirety of your life.

Term life insurance

Generally speaking, term life insurance is intended to be a low-cost option for a specific period of time — or, a term. Most terms can be renewed, even if the state of your health changes, but your premium might be higher.

Here are some other features of a term life policy:

• Can be purchased for a set time period, like 10, 20 or 30 years

• Can be converted to whole life insurance

• Becomes more expensive as you age

• Benefits are paid only if you die while the policy term is in effect

• Low monthly costs with easy signup

• Can be customized with a term life insurance rider (or a few!)

   

Whole life insurance

Whole life insurance is more complex, but it is lifelong coverage that also has an investment component, which is known as the policy’s cash value. This value grows in a tax-deferred account, so you don’t pay taxes on these earnings while they accumulate.

A whole life policy also features:

• A set premium for as long as you live

• A guaranteed death benefit

• Eligibility for annual dividends

• Higher monthly costs, but with a higher payout in the end

• Eligibility to pay for estate taxes

How much life insurance should you buy?

You should plan to buy a term life insurance policy that is valued at least ten times your annual salary. Remember, life insurance isn’t an investment; it’s designed to give your beneficiaries a nest egg in the event you aren’t there to provide for the people you're currently providing for.

Now that we’ve looked at some of the differences in the two main types of life insurance, let’s find the plan that’s best for you and your family.

Picking the right life insurance policy.

There are a number of things to consider before you decide on a life insurance plan. For example, if you are 30 years old, have a young child, and are the primary breadwinner in your household, a term life policy might be beneficial for you. Or, if you’re 50 or 60 years old and your term life policy is about to expire, converting to a whole life option might be beneficial. Here are some other factors to think about:

• The current state of your health

• Your family’s financial needs

• The age(s) of your children

• Your current debts

• Your retirement plans

• The future needs of your family (like college tuition, for example)

Life insurance is a big, but personal decision. It all depends on your family’s needs, and what you’d want for them in the event of your passing. Enjoy every moment, knowing your loved ones are in good financial hands when you’re gone.