What’s the Difference Between Term and Whole Life Insurance?
Simply put, according to Nerd Wallet, Term Life Insurance costs much less than whole life insurance but has an end date. Whole Life Insurance can give you lifelong coverage and extra benefits during retirement. Term Life Insurance on the other hand covers you for a shorter period of time but is often cheaper and easier to understand.
Term Life Insurance
Term Life Insurance is the easiest to understand and has lower premiums. It covers you for a fixed period of time, such as 10, 20, or 30 years.
If you do not pass during the term, your coverage ends and no one receives any money. Also known as “Pure Life Insurance,” Term Life Insurance was developed to protect your dependents in case of your untimely death.
With a term policy, if you pass away within the term, your beneficiaries receive the payout. The policy has no other value. With this type of life insurance, your cost stays the same throughout the term of the policy. Nerd Wallet suggests when you shop for Term Life Insurance, you choose a term that covers the years you will be paying bills.
You should buy an amount your family would need in the event you were no longer able to provide for them, some large expenses to consider would be your income, services that you currently pay for, and even child care.
Term Life Insurance can work for you if you just plan on replacing your income for a short term upon your death, such as the years it will take to raise your children or the years it will take to pay off your mortgage.
Whole Life Insurance
Whole Life Insurance on the other hand is more complicated and tends to cost more than term. However, it does have additional benefits, such as providing a cash-value account that you can use for funds later in life.
The cash value grows slowly in a tax-deferred account. You can borrow money against the account or close out the insurance policy for cash.
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A few reasons why people choose Whole Life Insurance over Term Life Insurance is that:
- You want to provide heirs to pay inheritance or estate taxes.
- You may have a lifelong dependent that will need care after you have died.
- You want to spend the money you have saved for your retirement and still be able to leave money to your heirs or to cover your funeral costs.
- You want to equalize your inheritances. For example, if you leave a property or a business to one child, Whole Life Insurance can compensate the other children.
At the time of your death, your family will be able to use the proceeds from either type of policy to cover such things as funeral costs, mortgage payments, college tuition.
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