Term Life Insurance or Whole Life Insurance: Which One Should You Choose?

What Is Life Insurance?

Life insurance is a contract between you and your insurer that helps you leave behind assets for your loved ones. This policy guarantees that your insurer will pay a specified amount of money to your beneficiaries once you have passed away. You’ll be required to pay premiums over the duration of the policy. Life insurance allows you to provide financial support to your loved ones as they deal with your passing. Most policies contain a cash value that accumulates over the life of the policy on a tax-deferred basis. Your loved ones can use the benefit to cover your funeral costs or other expenses. This guide explores the differences between two popular life insurance policies: term life insurance and whole life insurance.

Term Life Insurance Explained

Term life insurance covers you for a specified period of time. The policy’s primary function is to provide financial assistance to your loved ones if you pass away during the term. If that happens, your beneficiaries will receive the payout. You can choose a term of 10, 20, or 30 years. Normally, the payout and the premiums are fixed. The policy carries simple value.

When researching term life insurance policies, look for a term that provides coverage during your working years so that your family will be protected if you suddenly pass away. Choose an amount that covers your loved ones if you are no longer around to provide for them. The benefit could act as a substitute for your income and help your loved ones move forward. In a perfect scenario, you’ll no longer need coverage once the policy expires because you and your loved ones will be financially secure.

Whole Life Insurance Explained

Whole life insurance covers you throughout your entire life. A major feature is the ability to invest and improve the policy’s cash value. The cash value increases in a tax-deferred account. You’ll have the peace of mind that you won’t have to pay taxes on the gains. You have the option to borrow money against the account or cash out the policy. Be aware though that once you cash out the policy, you are no longer protected. Also, if you don’t repay the loan with interest, you will decrease your death benefit.

Whole life insurance is considered slightly more complicated than term life insurance, but you’ll also enjoy multiple layers of security. The policy’s premium will be fixed and the cash value account will grow at a fixed rate. The death benefit is also guaranteed. Many whole life insurance policies accumulate dividends. You can cash out the dividends, leave them in your account to gain interest, or you can use them to decrease your premiums. Remember that receiving a dividend is not guaranteed.

Term Life or Whole Life: Which One Should You Choose?

Assess your individual situation. Term life insurance is an asset if you only need coverage to replace a lack of income over a specific time period. Term life policies are also viewed as more affordable because they don’t contain cash value. Think about it as a potential investment opportunity. Buying a term life policy may allow you to invest the amount that a whole life policy would cost. Also, remember that some term life policies give you the option to convert them into a more permanent policy if your life circumstances change.

Whole life insurance is an asset if you want to leave an inheritance or money to help cover estate taxes. If you have a lifelong dependent, life insurance allows you to fund a trust that will provide financial security after you have passed away. You can also speak with an advisor and set up a plan to use the policy to enjoy retirement and still leave money behind for your loved ones. If you have multiple beneficiaries, you can use whole life insurance to equalize the distribution of assets.

Alternative Options

If you need coverage but you still want to assess your options, there are alternative life insurance policies that you may consider. Universal life insurance policies accumulate interest by the current market projections. Indexed policies accumulate interest based on the demand for stock indexes. Variables policies give you the opportunity to make an impact in the stock market. Depending on the state of the market, these alternative policies could be more beneficial than term or whole life policies.

Take note of your personal situation. If you believe that you only need life insurance for a 5- or 10-year period, term life insurance may be the best option. If leaving a legacy behind is important to you, whole life insurance might be more suited to your situation. If you have more questions related to life insurance, contact our experts here at Burton A. Harris Insurance Agency today! We can guide you through the process involved and ensure that you make the best decision for your future.