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The Big Insurance Decision: Whole Life Versus Term Life Insurance

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Having a life insurance policy can provide financial protection for your family. Determining whether a term life or whole life insurance policy is right for you can be complicated. Let’s examine both types of insurance to see which one is right for your family and your finances.

The differences between term life and whole life

Term life insurance lasts for a set number of years, usually 20 to 30. If you die before the term ends, your term life policy pays out to your beneficiaries.

Whole life lasts longer, usually until you reach a certain age, such as 100. Essentially, this policy lasts your entire life. When you die, it pays out your death benefit to your beneficiaries.

Whole life insurance also builds a cash value. A portion of your monthly premiums goes toward building up this value. When it reaches a certain point, you can take out loans against this cash value — which you will have to pay back — or surrender your policy to receive the money it has accumulated.

Because it lasts your entire life and builds up a cash value, whole life insurance costs more than term life.

So which life insurance type is right for you? That depends.

The case for term life insurance

A term life insurance is the right choice for most. That’s because this insurance is affordable while still providing a financial safety net for your loved ones.

  • You can choose the length of your term life policy. Perhaps you have young children. You might choose a policy with a 20-year term. That way, the coverage will last until your children are no longer financially dependent on you. You can choose a longer or shorter term. For example, a longer term could help cover college expenses. A shorter term might be selected if your children are already teenagers.
  • A death benefit is paid to your beneficiaries if you die during your policy’s term. You can choose the size of this benefit. If you choose a term life policy with a $500,000 death benefit, you’ll pay more in annual premiums than if your death benefit is a lower $200,000.

Fidelity Life says that a $500,000 term life insurance policy costs an average of $19.30 each month for a healthy 30-year-old nonsmoker. That adds up to an average of $231.60 per year.

Term life insurance premiums will vary according to the size of your death benefit, length of your term, your sex, and your age and health when taking out your policy. Liberty Mutual estimates that a healthy 30-year-old woman can get a $20,000 term life insurance policy for less than $8 a month.

But what about whole life insurance?

If you’re willing to spend a bit more, a whole life policy does come with certain advantages.

  • It lasts your entire life. You won’t have to worry about your policy expiring. If you want to provide protection for your loved ones for your entire life, a whole life policy might be the better choice.
  • The cash value component. Unlike term life insurance policies, your whole life insurance policy will earn value over time. This value grows at a rate set by your insurer. Your policy might also pay you regular dividends, depending on your policy terms.

These benefits come at a cost, though. Aflac says that a $500,000 whole life insurance policy costs an average of $451 each month for a 30-year-old nonsmoker in good health. That totals $5,412 a year.

A whole life insurance policy is more expensive than a term life insurance policy. Whether you chose term life or whole life depends on how long you want your life insurance protection to last and how much you are willing to pay for it. That more-affordable price tag is why term life insurance remains the most popular form of life insurance.

No matter which option you choose, having any life insurance coverage in place is a critical step toward protecting your family’s financial future. To learn more about protecting your family’s future and securing peace of mind, sign up for a future workshop to learn about the estate planning strategies that can help you.

 

Bridget Mackay
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