When you’re researching life insurance, you’ll quickly learn that there are several types of coverage – term life insurance, whole life insurance, variable life insurance, simplified issue life insurance, and the list goes on.
Term life insurance and whole life insurance are two common types of coverage with two very distinct differences, which are how long the coverage lasts and how much a policy costs. Both, however, do exactly what life insurance is meant to do: financially protect your loved ones from the unexpected.
Whole life insurance can be a good choice for someone who is seeking lifelong coverage and also wants a cash value component. However, the premiums for a policy can be cost-prohibitive.
Learn if whole life insurance is the right choice for you.
Definition of whole life insurance
Whole life insurance is a form of permanent life insurance that lasts as long as you keep paying your premiums. There are several different varieties of whole life insurance. Generally, the death benefit on a whole life policy is guaranteed to go to your beneficiaries, no matter how much time has elapsed since your policy began.
For example, if you start a whole life insurance policy when you are 20, your life insurance company will pay a death benefit to whoever is named as your beneficiary, no matter when you pass away — even if you live to be more than 100 years old.
Just like with any type of life insurance, the younger and healthier you are when you buy a policy, the more affordable the policy will be. Because monthly premiums on whole life insurance can be expensive, this detail becomes even more important.
What is cash value life insurance?
Another benefit of whole life insurance — and other types of permanent life insurance — is that it builds cash value over time. If you choose to do so, you can usually borrow from that cash value in the form of a policy loan or payment. However, borrowing against the cash value usually decreases the death benefit to your loved ones.
Term versus whole life insurance
When it comes to shopping for life insurance, the decision to get a term or whole policy really comes down to your personal preferences and situation.
Term life insurance is a simple, affordable type of coverage that is in place for a set period of time — typically 10, 15, 20 or 30 years. If you were to pass away during the term length, your loved ones will receive a death benefit. Typically, people have a term life insurance policy in place during the years their family needs it most — until the mortgage will be paid off or the kids will be adults, for example.
Whole life insurance provides coverage for a lifetime and includes a cash value component that can grow over time. These features are why permanent policies can cost anywhere from 5 to 20 times more than a term life policy.
Term life insurance might be a fit if you:
- Are looking for an affordable way to financially protect your family
- Are seeking coverage to help your partner cover the day-to-day bills if you were no longer around
- Need coverage until your children are financially independent
- Need a policy to help pay specific co-signed debts (i.e. a mortgage or student loans)
- Have, or plan to have, substantial money saved for retirement
Whole life insurance might be the right fit if you:
- Seek coverage that lasts a lifetime and won’t expire before you pass away
- Are seeking a product that offers a cash value component
- Can afford more expensive premium payments
- Want life insurance to be part of your long term-financial strategies
- Are interested in the tax advantages that are particular to whole life insurance
Cost of whole life insurance
Whole life insurance may not be the best option for someone on a budget or who wants more coverage. The cost of whole life insurance is significantly higher than the cost of term life insurance. But, the downside of term life insurance is that coverage ends, and you get nothing back. Ultimately, the right coverage will depend on what your budget can handle.
When we reviewed online insurance quotes from State Farm, we found that a healthy, 35-year-old man might pay the following premiums for a whole life insurance policy:
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In contrast, that same man might pay the following for a Haven Term policy, issued by MassMutual:
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For many young, cash-sensitive families, term life insurance provides them with an affordable way to protect their family. The lower premiums also help prevent families from purchasing less coverage than they need.
How much life insurance do you need?
There is no perfect amount of life insurance that suits everybody’s needs, but a common figure is to have enough life insurance to equal between 5 and 10 times your yearly income.
Protecting your beneficiaries from hardship is the key consideration when deciding how much life insurance you need. This means that you should consider all of your expenses, such as your mortgage or rent, the cost of childcare, or any outstanding debts. Fortunately, an online life insurance calculator can do the math for you.
Choosing the right coverage for your loved ones
You know best what kind of life insurance coverage suits your financial situation and needs. As you consider your options, start with one basic principle: Buy coverage that you will be able to continue to afford.
Life has a way of throwing curve balls at us. You’ll want to make sure that you not only have life insurance coverage to financially protect your family, but you also want to ensure that if you lose your job, take a pay cut or anything else unforeseen comes your way that you will be able to maintain paying your premiums.