If you’ve been in the market for life insurance, you’ve likely heard of the two most popular options: whole and term life insurance. Occasionally, whole life insurance is also referred to as permanent life insurance, but that name is a little misleading. Permanent life insurance means it protects you throughout your life. While whole life insurance is a form of permanent life insurance, it’s not the only kind. So, let’s find out five big differences between life insurance’s biggest players.
“How much will life insurance cost me?” is usually one of the first things that people ask when they are considering what to buy. It’s also one of the biggest differences between term and whole life insurance.
Term insurance will almost always cost you less than whole life insurance because it lasts for a specific period of time, and not your entire life. This means that the insurance company assumes less risk for a term policy than a whole life policy, because with whole life the death benefit is guaranteed. However, not all policies are made the same, and you should shop around for quotes before signing on the dotted line.
Length of Policy: Whole Life vs. Term Life
For a whole life insurance policy, the length of the term is simple; it lasts your entire life, and will pay your beneficiary the death benefit when you pass away. However, it’s more costly. This is why people tend to choose a term life insurance policy, since you can choose how long you’ll be insured for. It could be one year, or up to 30 years in some cases. You might be a good candidate for term if you currently have no family obligations, or would like to protect your loved ones, but can’t afford a high premium. The good news is that if you decide to convert your term policy into a whole life insurance policy, that can usually be arranged.
Policy conversions are a tricky area of life insurance, but need to be considered when you’re weighing your options. For example, if you’re in your early 20s right now, but plan to start a family within the next 10 years, you may want to get a 10-20 year term policy that have a conversion option. This will allow you to turn it into a whole life insurance plan which will protect your family for the rest of your life.
However, it’s not always easy to do the other way around. Whole life policies can accumulate cash value, depending on the policy you have. This doesn’t mean that you necessarily can’t convert it back, but you’ll want to check with an insurance professional before doing so, in case there are any penalties or tax implications.
This is simple: whole life insurance has a cash value associated with it, and term life insurance does not. Unfortunately, this is also where shopping for life insurance gets a little sticky for some people. Every company offers various versions of both term and whole life insurance. Talk with an insurance professional and learn about your options and the premiums associated with them. You may find that a whole life policy checks off two boxes on your retirement list by protecting your family and potentially paying you dividends in retirement.
This isn’t as big of a deal breaker as the other options, but depending on your financial situation, it may help persuade you to get whole life insurance. The funds you put into your whole life policy grow tax deferred, and depending on how your policy works, you may not have to pay taxes on that money even if you withdraw it to supplement your retirement. You’ll want to get several quotes and talk with a professional before you take the leap and make a whole life policy a part of your retirement strategy.