If you have started to examine life insurance options, you may wonder whether to go with term insurance, whole life insurance or a combination of the two. You have every right to be conflicted, as choosing the wrong type of life insurance for your circumstances could end up being financially destructive.
Major Difference
The major difference between term insurance and whole life insurance is that one is more of an investment than the other. Term policies only offer death benefits to a beneficiary if you die within the length of the policy you choose. Whole life insurance policies combine the term policy death benefits with an extra investment component. Whole life policies build cash value (as a savings account) that you can borrow against. You can also get some of the savings back---often more than you put into the policy to begin with---if you choose to cash out before you die.
Cost and Value
Whole life insurance premiums (payments) are higher than premiums for term policies because some of that money goes into savings. However, the payoff is that the indefinite policy gains additional value over time through dividends, interest or a combination of the two.
Length of Policy
If you plan to keep your insurance policy for under 10 years, a term policy may be better for you because the amount accrued in that time may not be able to balance out the cost of the premiums. However, if you intend to keep your policy for more than 20 years, you may be better off getting a whole life policy. You may end up wanting to keep it for 13 or 15 years. Regardless, it's a good idea to seek expert analysis from an insurance professional.
Determining Your Financial Needs
Say you are planning to make a large expenditure over the next two years (e.g. on the rest of your grown child's college education). You can rest assured that it will be covered---even if you die---if you take out a two-year term insurance policy in that amount. However, if you know you will still owe a large sum of money on something by the time you die (say, 30 years from now), you can take out a whole life insurance policy, betting that you will stay alive within those 30 years and that your savings account will accrue enough money to help cover a good portion of that debt.
Variables
You can buy a term insurance policy that stops after two years, 20 years or into your 80s. You may even choose a premium that increases each year, or choose to keep that premium the same. If you choose whole life insurance, you are taking a bit more of a risk. Some aspects of whole life insurance are guaranteed, but there are no guarantees about exactly what will come out of the account in the end. The three primary types of whole life insurance are: traditional whole life insurance, universal life insurance and variable life insurance. They all come with their own sets of rules, so if you do end up going with whole life insurance, know which sub-type best suits you. One last option you have, if you think it will suit your financial needs, is to select a combination term-plus-whole-life policy.
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