Should you apply for term insurance or life insurance? Both types have their advantages and disadvantages.
Therefore, it is important to know the difference between the two so you can make a decision that benefits you and your family. We will first define these two to provide you with a clearer picture.
Term Life Insurance
Term life insurance also known as pure life insurance provides coverage to people for a specific duration. This type of insurance protects your family in the event of your premature death. If you take out term life insurance and pass away prematurely within the terms and conditions of term life insurance, your family will receive the money.
Some key points to remember when you take out term life insurance is that you need to select a term that coincides with the years you will be paying your bills. Additionally, choose an amount your family would need to maintain their lifestyle after your premature death.
Whole Life Insurance
Whole life insurance offers lifelong insurance coverage and includes cash value, an investment component, which grows overtime and you will not have to pay taxes on it. If the need arises, you can borrow money against the account or return your coverage for money. You also need to repay policy loans with interest. If you don’t, it will reduce the amount your family will receive after your premature death. In the event you surrender your coverage, you will not have whole life insurance anymore.
Even though whole life insurance’s terms and conditions and structure are more complicated than term life insurance’s, whole life insurance is a more straightforward policy than other types of permanent life insurance policies. In whole life insurance, the premium remains the same during your life, it guarantees that your family will receive the death benefit, and it guarantees that your cash value account will continue to grow at a steady rate.
You will have to check with your insurance company on whether or not you can earn yearly dividends on your whole life insurance. Yearly dividends are a part of the insurance company’s financial surplus. Your insurance company can give you the yearly dividends in cash. If you want, you can earn interest on them by leaving them on deposit, repay the loans, or purchase more coverage.
A Break Down of the Differences between Term Life Insurance and Whole Life Insurance
Term Life Insurance vs. Whole Life Insurance
|Term Life Insurance||Whole Life Insurance|
|Duration||1 to 30 years||Life|
|Guaranteed Death Benefit||Yes||Yes|
|Guaranteed Cash Value||Not Applicable||Yes|
|How Cash Value Grows||Not Applicable||Yes|
|Premiums||Can increase periodically or remain the same at a guaranteed rate for the duration of the coverage||Can earn interest at a predetermined and specified fixed rate|
|Level of Risk||You will not lose coverage, but you will also not receive any cash value when the term ends||You are at not risk of losing the coverage|
When Should You Choose Term Life Insurance?
- You need to choose term life insurance if one or more of the following statements are true for you:
- You need to replace your income over a specific duration such as the years you are raising your kids or you need to pay off your mortgage
- You need to buy the most affordable term life insurance coverage
- You need whole life insurance, but you cannot afford it
*Note: You can convert your term life insurance to whole life insurance, as most policies offer you the option to do so when you see fit. However, you can only convert it by a certain deadline, which varies from coverage to coverage.
When Should You Choose Whole Life Insurance?
You should choose whole life insurance if one or more of the following statements applies to you:
- You want to provide your family with money to pay off the estate taxes
- You do not want your family to be forced into selling parts of your estate such as property or heirlooms to pay taxes
- You have a family member who depends on you such as a child with special needs and whole life insurance coverage can provide the care your child needs after your premature death
- You want to provide your family with inheritance or money to take care of themselves after your premature death
- You want to provide everyone in your family with equal inheritance. An example of this would be if you want to leave your business or house to one child, you will compensate your other children via the payout they will receive from this insurance coverage
If You Decide to Convert from Term Life Insurance to Whole Life Insurance, When is the Best Time to Do It?
If you have taken out term life insurance, but plan to convert it to whole life insurance, the best time to do so is when your term life insurance is about to expire and you are 50 and older. Your insurance company may not allow you to renew your term life insurance if you have reached a certain age, which means you will have to obtain whole life insurance. This is why it is better to convert to permanent life insurance.
In the event you plan to extend your existing life insurance policy, but the yearly renewable term options are not available anymore or have become too costly because of your age, you should convert to whole life insurance. In addition to this reason, you need to convert to whole life insurance if you are establishing an estate and are worried about estate taxes.
We hope that now you will be able to decide between taking out term life insurance and whole life insurance.
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