If you have a short attention span and only have time to remember one thing about life insurance make it this: life insurance is insurance. It is not an investment vehicle or a way to save money. You buy auto insurance in case you get in a car accident. You buy home insurance to protect your home and belongings. Buy life insurance to insure that if you die early your family can cover your financial obligations (mortgage, debt payments, college). Now that we have established what life insurance is for let’s compare the difference between term and whole life insurance.
Term Life Insurance
Term life insurance pays your dependents (beneficiaries) if you die prematurely during a specific period of time (term). It has no other function. Term insurance does not last forever. It only insures you for the specific period of time listed in your policy. 10-30 year policies are typical.
You want to choose a term that will end around the time your family’s major needs have been met. Your children will be independent, your home paid for and you have plenty of savings for retirement. A 30 year term would be for a younger person with a young family. This family will be a long way from funding their retirement and college goals. A 10 year policy would be a better fit for someone who anticipates paying off their mortgage and funding their retirement and college goals within the next 10 years.
Whole Life Insurance
Whole life insurance is the most well known type of permanent life insurance. Unlike term insurance permanent life insurance does not expire after a set amount of years. Whole life insurance will pay your dependents a specific amount of money when you die. This is called the “death benefit” and it is a guaranteed amount in a whole life policy. You pay the same premium as long as you live. This premium accumulates cash value that you can borrow against. The cash is guaranteed to grow at a certain rate. The drawback of whole life insurance is that it is very expensive.
Ask Yourself 2 Questions
Now you know the difference between term and whole life insurance. Here are 2 questions to help you decide which is right for you:
- Do I need life insurance forever? This might be you if you have a special needs child/dependent who will not become independent at a future date. Or if you have a large estate that can’t be easily sold to pay estate taxes when you die. In these cases whole life insurance may make sense depending on your answer to the second question.
- How much can you afford to pay? A 20 year term policy for $500,000 for a 40 year old healthy woman costs $306 per year. A $500,000 whole life policy for the same 40 year old woman costs $5897 annually. (source) That is a huge difference! A lot of us can’t afford a large whole life policy, but we can get a decent sized term policy without breaking the bank. Don’t buy a small whole life policy because you like the idea of it lasting forever. Too small a policy won’t actually give your family enough to live on if you die prematurely.
Many of us get overwhelmed thinking about which type of policy we need, how much insurance to buy, and how much it will cost. Then we decide to think about it later and push off the decision for awhile longer. You need life insurance to protect your family and the costs go up as you age or run into medical challenges.
Work with an insurance agent you trust who will take the time to understand your particular situation. Ultimately your agent should present you with a few options that make sense for your family. Financial planners can also be a great resource for trustworthy insurance agents since we work with them frequently.
Have friends who are overwhelmed when thinking about life insurance? Pass this article along to them.