Comparing term and whole life insurance
Choosing the type of life insurance that’s best for you depends a lot on your personal needs. Knowing why you’re buying a life insurance policy can help you decide which kind of policy to purchase.
Basically, life insurance comes in two varieties: term life and whole life. Determining whether you want one type or the other or a combination of both is your first step.
Term life policies cover you for a certain number of years (the term) and pay a death benefit if you pass away during the policy’s term. Term life insurance doesn’t build cash value. If you outlive the term of the insurance, the policy lapses and no benefit is paid. Generally, term life insurance costs less than permanent life, although premiums may increase over time. If your main reason for buying life insurance is to ensure your family’s financial wellbeing for a finite number of years—until your children are out of college for example—term life may be a good option.
There are several types of term life insurance. Annual renewable term is a one-year policy with a premium set for your age at that time. Level premium term has a death benefit and premium cost that remain the same and can be purchased in five-, 10-, 15-, 20-, 25-, 30- or 35-year terms. Mortgage life insurance is a type of term insurance featuring level premiums with the death benefit declining over time. The idea is to mirror the policy owner’s mortgage value to pay the balance should the owner pass away.
Along with providing a death benefit, whole life insurance builds cash value. A whole life policy typically costs more than term life. The insurance company invests the premiums you pay and generates dividends that become part of the cash value. You can borrow against the cash value of your policy. Should you pass away before repaying the loan on an in-force whole life policy, the balance is subtracted from the benefit that is paid out.