People often get confused when we talk about whole and term life insurance.
Though both are life insurance policies and have some similar features. There is still what differentiates them from each other. Besides, you can purchase a life coverage and add a feature that is not listed on your policy as a rider.
Planning to purchase coverage for the fun of it may turn into a disaster shortly. You must consider what needs you want to meet with the coverage and your budget at the moment.
So, first things first. How do you know the difference between a whole life insurance plan and a term life insurance plan? Surely, it’s not that confusing. Let’s find out below.
What is life insurance?
For starters, we need to consider the pillar behind these two features. What connects whole and term policies is the life insurance affixed between them.
Now, life insurance is a legal contract between anyone looking to be insured and an insurance company. In exchange for your premiums, the insurance company will pay a lump of money to your loved ones when you pass away.
This life insurance coverage comes in different types which include: whole life insurance and term life insurance.
Difference between whole life insurance and term life insurance
For clarity’s sake, we will talk about them independently, and you can decide on the one that suits you.
Whole life insurance
Whole life insurance is the main life insurance coverage. It is the coverage that lasts throughout the policyholder’s lifetime, and it has beneficiaries’ benefits.
This means that when you continue paying your premiums regularly, in the event of your passing away, the insurance company pays your beneficiaries a lump sum of money. This payment is known as death benefits.
More so, the whole life insurance has a savings feature that helps you to save while paying your premiums. This savings feature is called cash value.
Whole life coverage helps you build up this cash value over time by making premium payments more than the amount you ought to pay.
The money you save through this means grows with interests and is tax deferred.
The benefit of the cash value build-up is that you can borrow against it if you need an emergency fund and pay it back when you can. You can also withdraw from it if you need to.
Also, the cash value build-up can pay for your premiums when you accumulate them for a long time.
Whole life insurance cash value may not operate the variable interest rate but a fixed rate.
Importantly, you are free to withdraw your cash value build-up or borrow against it. When you do not pay back, it reduces the beneficiary benefits of your loved ones.
Pros and cons of whole life insurance
- It helps you to save
- You cover your loved ones even in your absence.
- Policyholders can add riders to the policy.
- You have an emergency fund you can withdraw or borrow against.
- It lasts for a lifetime.
- Your savings are tax-deferred.
- Your cash value can pay your premiums.
- It has fixed premiums.
- You may earn dividends.
- Ability to surrender.
- The premiums are expensive so, it may not be suitable for someone with a low income.
- Not paying back your loan reduces your beneficiary’s benefits.
- Cash value build-up takes time to accumulate.
Term life insurance
A term life insurance is pure life insurance coverage. As the name states, it is the temporary type that expires after a while.
The policy has a low premium amount, making it one of the cheapest life insurance coverage.
A term life insurance policy has a duration of 10 to 30 years before it comes to an end.
So, when it expires, you have three options; you can choose to renew it, turn it around into permanent life coverage, or even just let it go. If your insurance provider company allows, you can turn your term life into a whole life insurance policy.
Again, this coverage benefits younger policyholders because it checks your health and age. Most insurance companies will require you to go for a medical examination and medical history before you purchase term life insurance.
Term life insurance does not have a cash value feature. You can not save up with this policy. Additionally, your loved ones only get their beneficiary benefit if the policy was on when you pass away.
However, if the policy ends before you pass away, your loved ones will not get anything from the insurance company.
Pros and cons of term life insurance
- It is more beneficial to younger people.
- You enjoy low premium payment.
- Good enough for people without family or loved ones. So, they won’t worry about beneficiary benefits for anyone.
- It is flexible. You can turn it into permanent life insurance or renew the policy.
- It has an expiry date
- Not suitable for someone that has family and loved ones
- You can not save with it
- You may not qualify for the coverage
The difference between whole life and term life insurance is in their policies. While it is true that insurance providers seek to offer you coverage, they are also looking out for themselves. So, look out for yourself too.
Most insurance companies provide both policies for anyone interested. In case you wish to switch up your term life insurance.
Also, there are other types of these policies. This is why you must understand a policy and what they offer before you purchase the coverage.