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What is term life insurance?
Term life is a type of life insurance that provides financial protection for your family over a fixed period of time — typically 10, 20, or 30 years. According to recent data, 40% of insurance policies purchased in 2022 were term life insurance policies. Most people use term coverage to protect their income until they retire or their financial responsibilities shrink. If you pass away during the term, your policy pays an income tax-free lump sum — called a death benefit — to your beneficiaries.
Pros & cons of term life insurance
What is a whole life insurance policy?
Whole life insurance definition: A type of permanent coverage that never expires and is guaranteed to endow or mature. Like all life insurance, it pays out a death benefit when you pass away — but it also builds cash value over time. As an endowment contract, the cash value earns interest at a fixed rate and is scheduled to equal the death benefit at a predetermined, guaranteed age. This cash value can be used while you're alive. You can borrow against it or, in some cases, use it to manage premiums.
There are two distinct types of whole life contracts. Participating and non participating. Nonparticipating whole life meets all of the aforementioned attributes. Participating whole life products are typically provided by mutual companies and each year they will declare a dividend. This is a return of excess premium to a policyholder. There are several options available to consumers as far as how to use the dividend but it is most commonly used to buy additional insurance annually. This drives the death benefit, and consequently, the cash value to grow over time.
Whole life insurance pros and cons
How to choose the right type of life insurance
Get personalized life insurance quotes from top-rated companies to see if the investment aligns with your goals.
If you're looking for simple, affordable coverage during your working years, term life makes sense. If you need lifetime coverage or are planning your estate, whole life insurance may be a better fit — if you can afford the higher premiums. Blending term policies to offset your biggest risks with a participating whole life contract is a strategy that leverages your working years to protect both now and later. Dividends from a participating whole life contract, while non guaranteed, can work with the cash value to significantly shorten the amount of time you have to pay for the coverage.
Types of whole life insurance
The types of whole life insurance policies mainly differ by how you pay your premiums and whether it’s a participating and nonparticipating policy. All policies are guaranteed to endow, the difference is how they get there.
Other options include:
Single premium life insurance: Pay everything up front
Participating Whole Life: Specialized policies
Limited pay life insurance: Shorter pay periods allow for expedited retention of the guarantee and may generate larger annual dividend payments, improving the internal rate of return on your premium dollars.
What affects the cost of whole life insurance?
Whole life insurance benefits are based on your age, gender, health, and the amount of coverage you choose. Every insurer has unique rules, but generally, younger and healthier people pay less. Higher coverage amounts increase the cost.
Learn more about the best whole life insurance companies.
What if term or whole life insurance doesn’t fit your needs?
Explore other options like:
Indexed whole life insurance – cash value that track to market indexes
Guaranteed universal life – permanent coverage with fixed premiums
Simplified issue whole life insurance – no medical exam required
Final expense insurance – for funeral costs
Still asking yourself is whole life worth it or how does whole life insurance work? The answer depends on your needs, goals, and what you're protecting.
References
References
Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of oureditorial standards.
Internal Revenue Service. “Estate Tax.” Accessed April 09, 2024.
LIMRA. “2023 Insurance Barometer Study.” Accessed April 09, 2024.
