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Term Vs Whole Life Insurance Whats The Difference

Deciding whether or not to buy life insurance is a serious decision that can have a dramatic effect on your family’s future. By the same token, figuring out which type of life insurance you need is just as important. You may have heard people talk about term and whole life insurance, but what’s the difference?

If you’re clueless about the different types of life insurance and how they work, then picking a policy is a lot like trying to hit a bulls-eye in the dark. Arm yourself with the knowledge you need to ensure your family is protected by reading the brief guide to life insurance types below...

Term Vs Whole Life Insurance Whats The Difference

Term Life Insurance: What is it?

Term life insurance is, quite simply, life insurance that lasts for a period of time (term) that’s defined when the insurance is purchased. Should the policy holder expire within the specified term, the beneficiaries receive the full benefits.

What are the benefits of choosing term life insurance?

Term life insurance premiums are, on average, much lower than those paid for whole life insurance (which will be explained in detail below.) Terms typically last from one to thirty years, so flexibility is one more benefit of choosing term life insurance. Term life insurance can be used to pay for burial costs for the policy holder. It can also be used to pay for educational costs, mortgages, estate inheritance taxes, and other living costs for the beneficiaries.

Some term life insurance policies are now offering accelerated benefits options. With accelerated benefits, the policy holder can receive benefits before death in the case of a terminal illness. This costs more, but many policy holders will view the added cost as well worth it. There are several different types of term life insurance policies available, so be sure to do your research before you settle on any one type.

Are there any drawbacks to choosing term life insurance?

So the drawback to term life insurance is that the policy could end before the policy holder dies, resulting in no benefits being given out by the insurance company at all. However, some companies offer guaranteed renewal rates so that a new policy can be purchased (at higher rates) when the other one ends.

Whole Life Insurance: What is it?

Whole life insurance, on the other hand, is permanent life insurance that combines an investment component with life insurance. In other words, unlike term life insurance, a whole life insurance policy lasts for the insured’s whole life.

Whole life insurance also includes an investment component. A portion of one’s whole life insurance premium is stored away in a cash account. The policy holder can then borrow against the cash value of the account or even make withdrawals from the account.

Participating vs. Non-participating

While there are also several different types of whole term life insurance, the two main types you need to understand are participating and non-participating. The difference is that participating policies pay dividends on company earnings, while non-participating policies do not.

What are the benefits of choosing whole life insurance?

The obvious benefit of whole life insurance is that you are covered for your entire life. There’s no worrying that your insurance policy won’t outlast you, leaving your beneficiaries with nothing.

Also, with the investment component, you get a bit more flexibility with the money you’re paying in. Whole life insurance is also a good choice for those with large estates because you can buy a policy that will cover the hefty taxes estate inheritance incurs.

Are there any drawbacks to whole life insurance?

When compared to term life policies, whole life insurance policy premiums are higher. This may or may not matter to the potential policy holder. Term life insurance is a more affordable option for those who can’t afford, or don’t want to pay, the higher rates associated with whole life insurance.

Choosing the right policy for your needs

There is no "one size fits all" life insurance policy that’s the perfect policy for every person. Whether you end up choosing term or whole life insurance will depend greatly on your particular wants and needs. Do some more research into the different kinds of term life and whole life insurance policies that are available to you. Carefully consider your options and make the choice that is best for you and your family, both now and in the long run.