Protecting your loved ones is always the right call. But how do you decide which life insurance plan is right for you?
While there are quite a few different life insurance products on the market, we want to make your buying decision an easy one — so you can get back to the people who matter most.
Let’s focus on two of the best-known options: term life insurance and whole life insurance. We’ll discuss the differences between term and whole life insurance, and help you decide what’s best for you and your family.
Term life insurance
Most term life insurance policies are what’s called level term life insurance. These policies guarantee you pay the same premium (annual price) throughout the term of your contract. Depending on your needs, term policies have several advantages over whole life policies, including:
Affordability
For budget-conscious people who need to purchase a large amount of life insurance, term life insurance is a great solution. Premiums for term life are significantly lower than premiums for the same amount of coverage under a whole life contract. This affordability comes from the fact that you’re only paying for the protection should the unexpected happen while coverage is in force
Choice of term length
Term life insurance is, by definition, temporary. This allows you to perfectly tailor it to your needs during a specific season of your life. Typical durations are 10, 15, 20, 25, 30 or 35 years. But while term insurance doesn’t last forever, it can remain in force for decades — long enough to meet many people’s short- and long-term financial protection needs.
Rates based on age
The premium paid for a level term policy (the most common type of term policy) is based on the age of the insured at the time of purchase. This means that even though you get older each year, your rates for life insurance will not change. Since rates will never go up, you’ll always know how much to budget for with regard to premiums each year.
Conversion options
Many term policies have what is known as a conversion clause. This allows insureds the option to purchase a permanent policy once their term contract expires. For example, while Legal & General America doesn’t offer whole life policies, we do allow you to convert your term life policy into a permanent universal life policy. One great benefit of this provision is that rates for the new policy are based on the original age of the insured when the initial level term contract was issued.
Whole life insurance
Whole life insurance is sometimes referred to as permanent life insurance. Some of the benefits of whole life insurance include:
Permanency
Looking for one easy way to remember whole life insurance? Its name is a good place to start. Whole life insurance is designed to cover an insured person from the moment of issuance to the time they pass away. As long as premiums are paid, a whole life policy will remain in effect.
Rates are locked at the present age
The younger you start, the lower your premium is.
Cash value
Whole life insurance policies have a savings component in addition to death benefits. As premiums are paid, an account builds up cash over time. The cash value account also features either a fixed, guaranteed rate of return or a variable one, usually connected to the securities market. This latter type of policy is often referred to as variable whole life.
Policy loans and potential dividends
Whole life contracts allow insureds to borrow a specified amount of funds in the cash account, to be paid back at a low interest rate. Additionally, dividends are sometimes distributed to whole life policy holders. But don’t forget:Dividends are never guaranteed.
Compare the cost difference between term and whole life insurance
Term life insurance is considered the more affordable option. This is because the policy holds no monetary value unless the policy owner passes away before the end of the term. Its sole purpose is to replace the income of the policy owner in case of the
unexpected.
On the other hand, whole life insurance is generally more expensive for a few reasons. The first is that it lasts a longer period of time, including your older years when the insurance companies take on more risk. Another reason is that you’re not just paying for insurance itself. Whole life insurance costs more because it’s designed to build cash value over time instead of simply replacing an income in the event of an early death.
Bottom line: How to choose between term life vs. whole life insurance
When trying to determine which is better, term or whole life, it comes down to personal choice. Term life insurance provides affordable coverage for people on a budget, and it’s best for the years your family would need it most in the event of the unimaginable. On the other hand, whole life insurance may appeal to those looking for lifelong coverage at a fixed rate as well as the potential to build cash value.