Term vs. Whole Life Insurance: How to Choose
While the death benefits of whole and term life can be similar, there are key differences between these two popular types of life insurance.
Term life insurance is the easiest to understand and has the lowest prices. It covers you for a fixed period of time, like 10, 20 or 30 years. You can get life insurance quotes online.
When you shop for term life:
- Choose a term that covers the years you’ll be paying the bills and want life insurance in case you die.
- Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.
Ideally, your need for life insurance will end around the time the term life policy expires: Your kids will be on their own, you’ll have paid off your house and you’ll have plenty of money in savings to serve as a financial safety net.
Whole life insurance is more complex and tends to cost more than term, but it offers additional benefits. Whole life is the most well-known and simplest form of permanent life insurance, which covers you until you die. It also provides a cash-value account that you can tap for funds later in life.
Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:
- The premium remains the same for as long as you live.
- The death benefit is guaranteed.
- The cash value account grows at a guaranteed rate.
Some whole life policies can also earn annual dividends, which pay you back with a bit of the insurer’s profit. You can take the dividends in cash, leave them in your account to earn interest or use them to decrease your premium payments, repay policy loans or buy additional coverage. Dividends are not guaranteed.
How to choose?
Choose term life if you:
- Only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage.
- Want the most affordable coverage.
- Think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.
- Think you can invest your money better. Buying a cheaper term life policy lets you invest what you would have paid for a whole life policy.
Choose whole life if you:
- Want to provide money for your heirs to payinheritance or estate taxes. In 2020, estates worth more than $11.58 million per individual or $23.16 million per couple are subject to federal estate taxes. State inheritance and estate taxes vary.
- Have a lifelong dependent, such as a child with special needs.Life insurance can fund a special needs trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.
- Want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.
- Want to equalize inheritances. If you plan to leave a business or property to one child, whole life insurance could compensate your other children.