After you pass, you can leave cash benefits for your family. This can be done through term life and whole life insurance policies. Term life insurance policy is a temporary policy that is inexpensive and comes with an expiry date. Whole life insurance builds up the cash value and is expensive as compared to term life insurance policy but has the life of the insured as long as they pay the premiums. One can get a policy of their choice from Life Insurance Companies.
Getting back to the basics, it is important to understand the difference between term life insurance and whole life insurance and which one will work the best for you. Let us look at them in detail -
Term Life Insurance -
Term Life Insurance is very straightforward - no bells, no whistles! People buy term life insurance policies from life insurance companies because of the promise of the death benefit for the beneficiary should they pass away while it is in force. As the name suggests, term life insurance is good for a certain amount of time be it 5, 15, or 20 years. After that, once the term is over, the policy expires.
Pros of Term Life Insurance -
Simplicity and fine duration, two are of the biggest factors why term life insurance is comparatively affordable as compared to whole life insurance. Term life insurance can be a great fit for you if you want a life insurance policy that protects your family when you die. Term life insurance policies are affordable and usually last until your child (if you have any) enters adulthood. It can be a great option for single parents who might need an additional safety net.
Cons of Term Life Insurance -
A lot of factors can change the prices of the premiums. Larger or longer death benefit coverage increases the life insurance quotes. Also, a lot of policies require a medical exam and so if you have any health complications, then it can raise the premium rates above the norm too.
Because the term life insurance policy comes with an expiry, you may find yourself spending all that money other than your peace of mind. Also, you will not be able to use the money that you have invested in term life insurance to save on taxes or build wealth.
Whole Life Insurance -
Whole life insurance is permanent life insurance that is very different from term life insurance. Whole life insurance will never expire as long as the premiums are paid. It also provides cash value in addition to the death benefit that can be an additional source of funds for the future.
Pros of whole life insurance -
Almost all the whole life insurance policies are premium-level ones. This means that you will have to pay the same monthly premiums throughout the policy duration. Also, the premiums are divided into two parts - a part of it goes into insurance components and the other part builds up the cash value that grows over time.
Life Insurance Companies offer a guaranteed interest rate of 1% to 2% annually however some may also sell participating policies that pay unguaranteed dividends which contributes to increasing the total return. Early on, the premium amount for whole life insurance is higher than the cost of the insurance itself. As you get older though, it reverses ad the cost reduces. This is known as front-loading the policy.
After some years, you will be eligible to borrow or withdraw from the cash value amount that grows on a tax-deferred basis. With that amount, you can pay your child’s college tuition or do the necessary repairs for your house. Whole life insurance, in some ways, is rather a flexible tool as compared to a term policy. Loans from this policy are tax-free. However, you are required to pay income tax on the investment gains from any of your withdrawals.
Cons of whole life insurance -
One of the major disadvantages of whole life insurance is that it is more expensive than term life insurance. Permanent policies cost a minimum of 5 to 15 times more than the term coverage with similar death benefit plans. For a lot of people, this high cost makes it difficult for them to keep up with the premium payments.
Another con of whole life insurance is that it is complex in nature. With a term policy, you can stop making the payments if you are not able to afford it.
The Bottom Line -
Both whole life insurance and term life insurance policies have their own set of pros and cons. While whole life insurance offers flexibility in cash value components, term life insurance is more affordable.
When you have to make a choice between the two, the most important factors to consider are affordability and financial goals. Based on that, you can select a plan most suited for you from life insurance companies.
