Term Life Insurance Vs. Whole Life Insurance:
What's the Difference?
Insurance can be a minefield, especially to those who only have limited experience of it. No one wants to think about their death, but it is important to put provisions in place while you are alive. A life insurance policy will keep your heirs protected financially after your death, but which kind of life insurance policy do you need to ensure they will be taken care of? Take a look at Best US Health Insurance Companies of 2020. And does your policy qualify as MEC insurance based on federal guidelines? Let’s take a look at the difference between term life insurance and whole life so you can choose the best one for your circumstances.
Term Life Insurance
Term life insurance is by far the easiest type of life insurance to get your head around. With a term life insurance package, there’s no investment build up or cash value, while the insurance still provides the expected benefits on the death of the policy holder. Term life insurance is the insurance type favored by relatively young and healthy policy holders who are just looking to cover all their bases.
But what’s to stop everyone taking out insurance while they are young and healthy? Well, that’s where the ‘term’ part of it comes in to play. Term life insurance only covers the subject for the duration of the specified term. The term length can be anything from a single year to a number of decades.
The amount of death benefit paid and the premium charged will remain static throughout the duration of most contracts, but this is something you should always be sure to check beforehand. As with other types of life insurance, the benefits paid out from a term life insurance policy are tax-free.
What Happens at the End of My Term?
A term life insurance policy only covers you during the specified term, and there is rarely any leeway on this. If you are approaching the end of your term and you want to maintain coverage, you will need to speak to your policy provider about what options are available to you.
If your health has deteriorated since you first took out your term policy, be prepared to pay extra in premiums to compensate.
Some providers will give you the option of converting your term life plan into something more permanent. This can enable you to lock in the same terms for the rest of your life. If you have maintained your health and can show that you are a safe investment, providers are more likely to consider this as an option.
Having a conversion option attached to a term policy will also means that you will be exempt from proving insurability in order to convert. In this case, you can retain the same terms even if your health has deteriorated.
Advantages and Drawbacks
The main benefits of a term life insurance policy are the low cost, high coverage amount, and the simplicity of the policies. Other forms of life insurance can seem complicated, and you don’t want there to be any ambiguity about whether a policy should pay out or not if something happens. If you can sign a policy with a conversion clause, this should be seen as added value. This article from Insurance Geek goes into more detail about the differences in terms of cost. Visit Insurance Geek to find out more.
There are some drawbacks to a term life insurance policy, however. Of course, there’s the obvious - that coverage only applies for the duration of the specified term. For some people, the lack of any kind of equity build up can make this a non-starter.
Overall, term life insurance is ideal for short-term coverage, but is not a good long-term option. The exception is if the policy comes with a conversion clause that means it can be converted into a more permanent policy.
Whole Life Insurance
As you might have surmised, whole life insurance is life insurance that applies for the remainder of an individual’s life. There are benefits paid out to the beneficiaries upon the death of the policy holder, as well as the options of building up the cash value of the policy.
The policyholder has the right to withdraw cash against their policy in the form of either withdrawals or loans, depending on the terms of the policy. Each of these options has its own benefits and drawbacks.
First, policy withdrawals - withdrawing funds against the cash value of the policy is not taxable, provided it doesn’t exceed the amount of money that has been accumulated by the policy. Any amount beyond this limit will be subject to taxation as taxable gain. It is therefore important that you are careful about withdrawing any money and ensure that you remain below the limit.
When you take out a loan, you are borrowing the cash against the cash value of the loan. Essentially, you are using the cash value as collateral for the loan. While the insurance policy itself is tax-free, you need to remember that a loan is just that - a loan. If you aren’t able to pay it back, any unpaid balance will be deducted from any death benefit paid out. You will also gather interest on the unpaid balance.
Advantages and Drawbacks
The most obvious benefit of whole life insurance is that the policy will last until the death of the policy holder. The only exception to this is if you lapse on your payments and end up voiding the policy. The premiums and coverage of whole life insurance are locked in from the beginning of the policy. This contrasts with term life policies where these can change over the course of the policy.
The flexibility offered through the ability to cash out a whole life policy further adds to the value of a whole life policy. If you think that you will want to access this money in the future, to pay for a family member’s care, for example, this option can give you some added financial security.
No one wants to think about dying, but as soon as you have a family of your own to think about, it becomes inevitable. A life insurance policy will help to protect your loved ones financially in the event of your death. Think carefully about which policy type is the most appropriate for your circumstances.
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