Matt Watson
When shopping for life insurance, you’ll face several important decisions.
One of the most basic is whether you want a term life or whole life policy. Understanding the benefits and risks of each will help you choose the best policy for your current and future financial needs.
Term life
With term life, you pay premiums for a certain period, say 20 years, and in exchange, the insurer agrees to pay your beneficiaries a stated benefit if you pass away during that time.
Pros
- You’ll receive great value. Term insurance can be purchased in large amounts for relatively small premiums.
- You can match terms to needs. Many people choose to match the length and amount of their mortgage to the term and coverage amount of their life insurance policy. If the unthinkable happens and you pass away, the mortgage can be paid off with the life insurance proceeds, providing protection and security for your loved ones.
Cons
- The policy is temporary. One of the key benefits of term life also is its biggest risk. If your term expires and you still have life insurance needs, you’ll re-enter the market as an older and potentially less-healthy consumer. That means significantly higher premiums, provided you qualify for coverage.
- The benefit may not be paid.If you outlive the term, your beneficiaries may never receive the benefit. Companies like State Farm offer Return of Premium Term life insurance, though. With this type term life insurance policy, the premiums you’ve paid will be returned to you if you outlive the term. If you pass away during the term, your beneficiaries will receive a death benefit.
Whole life
Whole life insurance provides a death benefit throughout your life. It also includes a cash value component that accrues value over time, allowing you to borrow or withdraw funds as needed.
Pros
- Lifetime coverage. A whole life policy covers the rest of your life, not just a stated term. As long as your policy is in force when you pass away, your beneficiaries will receive a death benefit.
- You’ll retain access to your money. A portion of the premiums you pay for a whole life policy become part of the policy’s cash value. Once sufficient cash value has accrued, this cash value becomes available to you through loans or as a surrender value. You even can report the cash value as an asset when applying for a line of credit. Any way you choose to use it—if you choose to use it—the cash value of a whole life policy provides another level of financial security for your family.
- You may receive dividends. The insurer may pay dividends to whole life policy owners, depending on the company’s financial performance. Although dividends are not guaranteed, the possibility of earning dividends is an attractive feature of whole life policies.
- Estate planning. If you plan to pass on sizable assets, your attorney or estate planner can help you use the policy’s death benefit to address estate taxes for your heirs.
Cons
- Higher initial premiums. In the first years of a whole life policy, the premiums often are higher than a comparable term life policy. However, the lifetime level premiums for a whole life policy become more affordable over time, while term renewals can involve significant increases in premiums.
Good financial decision-making is based on solid research and sound advice. If you’re in the market for life insurance, be sure to discuss your options with a qualified insurance representative and consult your tax and legal advisor regarding your situation.