There are two primary types of life insurance: “term life” and “whole life.” While both provide a death benefit, they have some important differences.
Term life insurance
Term life insurance is a type of life insurance in effect for a set period of time. It pays out a death benefit to your designated beneficiaries if you die while coverage is active. It is solely a life insurance product, with no investment component.
Term life insurance is much more affordable than whole life insurance. That’s especially true if you shop around for the best life insurance companies. In fact, whole life premiums often cost four times more than a term life policy. However, term life insurance gets its name because it’s in effect only for a limited period of time. It’s common for policies to have a 20- or 30-year coverage term.
If you pass away while your policy is in effect, the insurance company will pay a death benefit. This money goes to whomever you designated as beneficiaries. You can choose the amount of your death benefit. Some policies could provide millions in coverage. The best life insurance companies give you a wide choice of coverage amounts. However, the larger your death benefit, the costlier your premiums.
If you don’t die while your policy is in effect, your policy will simply expire at the end of the term. Your death benefit will never be paid out. With the best life insurance companies, you may have the option to buy a guaranteed renewable term policy. That means you can extend your term of coverage if you’d like. But premiums could go up when your life insurance coverage renews.
Whole life insurance
Whole life insurance is a type of life insurance policy that remains in effect for your entire life as long as you pay premiums. As long as you don’t let your policy lapse, your insurance will pay out a death benefit when you die. Whole life policies also have an investment component and acquire a cash value that you can borrow against or cash out.
You won’t have to worry about whether you can renew your coverage. And you won’t have to think about whether your premiums will go up. Whole life policies are much more expensive than term life insurance. That’s true even with the best life insurance companies. But as long as you keep paying premiums, your beneficiaries eventually get the death benefit.
One reason whole life policies are more expensive is that they are also an investment vehicle. That’s true even with the best life insurance companies. Your policy accrues a cash value over time. You’re eventually able to access it. You can withdraw some of the money, borrow against your insurance policy, or surrender your policy.
There are tax benefits associated with investing in a whole life insurance policy. However, many financial experts believe you can earn a better return on investment elsewhere. Most recommend buying term life insurance from the best life insurance companies and keeping your investments separate unless you need lifetime insurance coverage.
