Term Life vs. Whole Life Insurance: How to Know Which You Need

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Life insurance is often overlooked as part of a financial plan, but it can be a critical addition to your basic financial security. Part of the reason life insurance is often maligned is that it can be difficult to understand. But the basic concept is that your life insurance policy will protect you and your family against financial loss in the event of your death, which is particularly important if you are the main breadwinner in the family.

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While you should speak with a life insurance specialist or financial advisor before committing to a policy, here’s what you’ll need to get a basic understanding of the difference between the two main types of life insurance, term and whole. .

Term Life vs. Whole Life Insurance: How to Know Which You Need Term v Whole Life Ins

Term Life Insurance Basics

Term life insurance is the cheapest and simplest type of life insurance. As the name suggests, term life insurance only protects you for a specific period of time, often 10 to 30 years. There are few additional bells and whistles with most term life policies. Your premium goes entirely toward the cost of your insurance, including policy fees and charges, and there is no investment component involved. Generally, you can choose whether you want a level premium throughout the course of your term or whether you want your policy to renew continuously, possibly at variable prices.

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Term life insurance can be significantly less expensive than whole life insurance because it only provides coverage for a limited time and doesn’t offer many additional benefits.

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Whole life insurance basics

Whole life insurance lasts your entire life, rather than just a specific term. But there are many more aspects of whole life insurance that make it very different from term insurance. In general, permanent life insurance is more like an investment than the simple insurance coverage that term life insurance offers.

When you invest money in permanent life insurance, your premium is divided into three separate components:

  • The cost of insuring
  • The rates and charges of the policy itself.
  • The cash value of the policy

With a whole life policy, a portion of your policy is invested and earns a guaranteed minimum amount. In most policies, you can borrow or even withdraw at least part of the cash value. You can also get full cash value if you drop your policy, though there are likely to be high fees and penalties if you drop your policy within the first few years after purchase.

Who benefits most from term life insurance?

Term life insurance is best suited for those who want the lowest cost insurance available and need coverage for only a specific time.

For example, if you only want insurance until your kids finish college or until you pay off your mortgage, you may want to buy a 20- or 30-year term policy. This will be the cheapest way to get insurance for the time you need it most.

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It’s also the best option for those looking for the highest possible insurance payout for the lowest possible cost. Term life insurance only pays if you die while the policy is still in force, which means there’s a good chance the insurance company won’t have to pay you anything at all. The reason a whole life policy costs more is because if you keep that policy for your entire life, the insurance company will ultimately have to pay the death benefit.

Who benefits most from whole life insurance?

While term policies offer no cash value or payment after the covered period expires, whole life policies offer an investment component that grows over time, along with a permanent death benefit. Whole life policies are best for those who want consistent insurance throughout their lives at a consistent premium.

This feature can be important if you have a health problem or anticipate health problems, as your insurance will remain in force and your premiums will not increase regardless of your condition. You can also use the cash value component to pay premiums if you can’t afford them, or borrow or even withdraw those funds if you need the money. The trade-off is that your whole life policy could cost much more than a term policy.

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About the Author

After earning a bachelor’s degree in business English from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned the Certified Financial Planner and Registered Investment Advisor designations, as well as being licensed as a life insurance agent, while working for a major Wall Street wiring company and his own investment advisory firm. . During his time as an advisor, Csiszar managed more than $100 million in client assets while providing individualized investment plans for hundreds of clients.

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