Deciding to secure the financial future of your loved ones with life insurance is an easy decision. What’s not so easy is deciding which type of life insurance policy is best for your needs. There are several types to choose from, and they all offer different features that can play an important role in your financial strategy. Here’s a simple rundown of term life insurance versus whole life insurance to help you decide what’s best for you.
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What is Term Life Insurance?
Term life insurance provides coverage for a specified period of time. If the insured person dies during this period of time, the insurance company pays a sum of money, known as a death benefit, to the beneficiary. Typical term life insurance periods are for 15, 20 or 30 years, or to-age-65.
With term life insurance, premiums remain level. This means the amount of money the insured pays for their policy each month, quarter or year is the same for the entire term period.
At the end of the term period, the life insurance coverage ends. Sometimes, an insured can choose to renew their coverage sometimes at a higher premium that increases annually to age 95 or 98.
Term life insurance provides several advantages:
- It’s a great choice for younger adults or for people who have a temporary need for coverage.
- It’s easy to understand and manage a policy.
What is Whole Life Insurance?
As the name implies, whole life insurance offers lifelong protection. Even after you retire, life insurance can play an important role in your financial plan by:
- Protecting your loved ones from your final expenses.
- Providing a comfortable retirement for a spouse or partner.
- Leaving a legacy to help support your children or grandchildren.
Like term life insurance, whole life insurance features level premiums that remain the same.
Another difference from term life insurance is that most whole life policies allocate part of the premium to the cost of the insurance; the remaining amount is deposited into a cash value account that typically earns interest tax deferred and grows over time. If the policyholder terminates the policy, the policyholder will be paid based on the cash value. Policyholders can also usually borrow money from their policy tax-free without decreasing the death benefit as long as the loan is repaid.
Whole life insurance provides several advantages:
- It provides coverage that lasts a lifetime.
- It features cash value that can be used for other financial goals.
- It may provide tax benefits.
Term Life Insurance vs. Whole Life Insurance…What’s Best for You?
One way to think about term life insurance versus whole life insurance is “renting versus owning.” Term life insurance is temporary but an option if you need income replacement during your working years should you prematurely pass away. Whole life insurance is a permanent option if you want lifelong coverage and tax-advantaged cash value benefits.
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