Most people don’t spend undue time worrying about an early demise when they’re still young, healthy, and seemingly invincible. But all it takes is one serious illness or injury or the death of a loved one to remind us that we’re only human, we’re fairly fragile, and that life is fleeting. In short, many adults, at some point, start to consider what kind of mess they’ll leave behind when they pass away. This can prompt them to explore the prospect of writing a will, letting a loved one know where important legal documents are kept, and of course, purchasing life insurance. But you’ll find that there are many different options when it comes to life insurance policies. The two most common categories, however, are term and whole life. The only question is, how can you decide which is right for you?
Although both term and whole life insurance will pay out in the event of your death during coverage, this is about the only way in which the two types of policies are the same – from there they diverge considerably. As you might have guessed from the names, term life insurance covers you only for a specific length of time, determined when you start coverage, whereas whole life insurance is good for life (although in both cases coverage is dependent on your ability to continue paying for the policy you have selected). So far, whole life sounds better, but don’t get ahead of yourself.
Term life can often be had at a much more affordable price than whole life, making it ideal for young people who are just starting their careers and devoting a lot of their limited income to the purchase of a first home, starting a family, and so on. Unfortunately, terms are set at 5 years, 10 years, and so on, so they’ll have to be renewed when they expire. And as you get older, the cost increases. In addition, there may come a time when your provider will no longer offer you term life insurance because of your advanced age. Just when you need it the most, you won’t have coverage.
Whole life insurance, on the other hand, starts out more expensive but your premiums will not increase over time (so long as your payments are uninterrupted). You’ll never have to worry that your insurer will raise the cost for coverage or drop you when you reach an advanced age. In addition, this type of policy builds cash value over time. While a portion of what you pay will cover the service that your insurance company provides, the rest will accumulate cash value that pays out in the event of your death. Even better, though, you can borrow against any funds you have accrued. And unlike most retirement plans, there are far less restrictions and penalties associated with drawing money from your “account”.
So what you really need to consider when performing a term life vs whole life insurance comparison is how much you can afford to pay now and what it will cost you in the future. Whole life insurance clearly provides better value in the long run. But if you’re under-insured at the moment and you don’t have the capital to pay for this pricy policy just now, think about starting with a term life insurance policy and then making the switch to whole life coverage when your term expires. So long as you’re still relatively young and healthy, your whole life premiums shouldn’t be significantly higher at 30 than they were at 25, just for example.