Term or whole? It's the first question you've gotta tackle to get life insurance. And, given there's no other reason to know what that jargon means (life insurance isn't exactly a party conversation starter), it's sometimes a deterrent. Thing is, deciding between term life insurance and whole life insurance is pretty easy. Here's the quick take on figuring out which policy is right for you.
Life insurance exists primarily to provide a financial cushion for your family, should you die. Term life insurance does just that for a fixed period of time. You pay premiums for five to 30 years. (Policies usually come in 5-year increments). If you die during that term, your beneficiary gets the death benefit, a tax-free lump sum they can use to pay the bills. If you don't, the policy expires. Term life is no-frills or "pure" life insurance, so it's generally affordable and easy to understand.
Whole life insurance covers you until you die, so, assuming you pay your premiums, your beneficiaries get a guaranteed payout. Whole life also doubles as an investment vehicle. Policies comes with what's known as a cash value component: A percentage of your premiums goes into a savings account and earns a fixed amount of interest. You can borrow against that cash value or cancel the policy for part of it after a period of time. But doing so gets complicated and you pay for the privilege in fees and higher premiums.
Honestly? You're probably better off with term life insurance (over 80% of people shopping for a policy are). Whole life sounds fancy, but it's much more expensive and the rate of return on its cash value is pretty low. Still, there are times when whole life insurance is called for. You can find a full explainer on those instances here, but below is an overview.
When to buy term life insurance
You want life insurance solely for the death benefit
You kind of just want to set your policy and forget it
You can't afford whole life insurance anyway
When to buy whole life insurance
You're rich & maxing out other retirement accounts
You have a special needs dependent
You're subject to the estate tax
Oh, yeah, a bunch of them, but don't freak out — that's actually a good thing. Especially if neither policy sounds like the perfect fit.
For instance, let's say, there's an outside chance you'll have a dependent well into retirement. You can buy a term policy, and a conversion rider allows you to make the policy permanent at or near the term's end.
And whole life insurance is actually just one type of permanent life insurance. So, if you can afford the premiums and have an appetite for risk, you can look into variable life, universal life and variable universal life. Confusing, we know, but a licensed agent or broker can walk you through you options.
For more answers to your burning life insurance questions, head over to our Learn Center.
Image: Paul Sutherland
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