When it comes to choosing the life insurance policy that’s right for you, now and in the future, you’ll find that the number of options available to you can be a bit overwhelming. Certainly, you want to do your part to make sure your loved ones aren’t burdened with undue expense in the event of your untimely demise. After all, the last thing you want is for your parents, siblings, spouse, partner, or children to get stuck footing the bill for your funeral, cremation, or other end-of-life expenses. And you definitely don’t want your loved ones saddled with your debt when you die. But picking a life insurance policy that you can afford can be difficult, to say the least. However, the decision-making process starts with understanding the differences between the two main types of policies available to you: term and whole life insurance.
The basic difference can be summed up in the names. As you may have surmised, a term life policy comes with a set term for coverage, say 10, 15, 20, or even 30 years in duration. At the end of the term you select, your policy will expire and you’ll have to renew it or switch to a whole life policy. A whole life policy (sometimes also called a permanent or universal policy), on the other hand, is good for the duration of your life. Once you lock in your rate, you’ll be covered until the day you die, provided you pay your premiums on time and in full.
The particulars of these policies differ quite a bit, as well. For example, a term life policy offers nothing more than a pre-selected payout at the time of your death. Whole life policies, however, often come with additional options like a “savings” portion. If you choose this option, a portion of your premium will go toward paying for your life insurance, with a set amount to be paid out to named beneficiaries upon your death. The other portion will be invested on your behalf as a sort of retirement plan. Since it’s all your money anyway, you can take out loans against the money in this portion of your policy during your lifetime. In fact, many such policies require you to start making annual withdrawals at a certain age (65 or 70, for example). Anything remaining at the time of your death will be rolled in with the payout of your life insurance.
The pricing for these policies is also different. All things being equal (i.e. the amount you select for the payout on your policy), you’re almost certain to pay higher premiums for whole life coverage, at least at a younger age. Although a term policy will cost you less when you’re in your twenties or thirties, the price can increase considerably as you get older and when you suffer from health problems. Even if you pay more initially for your whole life policy, the rate never changes, so in the long run you might end up paying less than you would by continuing to renew term coverage.