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Term vs. Whole Life Insurance: What is the Difference?

Here’s how you can figure out which life insurance policy is right for you – term vs. whole life insurance.

term vs. whole life insurance

So you’ve decided to start a new life insurance policy. Terrific! But before you start celebrating, you have an important choice to make.

Though all life insurance shares the basic death benefit, it actually takes a few different forms. Most notably, policies can be divided into two distinct categories, each with their own specific benefits: term life insurance and whole life insurance. Especially if this is your first life insurance plan, you may find your head spinning as you try to sort out which one best fits your needs.

Well, relax, take a deep breath and let’s delve deeper into the difference between term and whole life insurance.

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Making Sense of Life Insurance

One of the best things you can do for your loved ones is to make sure they are protected and secure.

The basics of term vs. whole life insurance

As we alluded to above, term and whole life insurance each offer a distinct approach to how your policy will function and the coverage it provides. Yet, before we delve into the benefits of each, let’s first outline how they’re so vastly different.

Term: As its name implies, this type of plan is temporary, offering a fixed premium that provides coverage for a predetermined period of time. Typically, the longest a term plan will extend is 30 years from the issued date, and if the insured dies before the policy expires, the designated beneficiaries will receive the death benefit. Because it offers a more limited scope of protection, term life insurance policies are often more accessible than whole plans.

Whole: Unlike term plans, a whole life insurance policy is a lifelong commitment. Coverage remains active for the policyholder from purchase until death, and accordingly, the benefits are available at anytime. In addition, whole plans have an intrinsic cash value, and policyholders can often borrow money against them. However, this option usually comes with a cost, affecting the long-term value of the policy. Other varieties of whole plans offer differing premiums and benefits, though they all tend to be more expensive than term plans.

term vs. whole life insurance

What to consider

Deciding between a term and whole life insurance plan will depend on a wide variety of factors. For instance, the former would be the best option if you’re only looking for coverage for a particularly high-cost period of your life. If you’re balancing a number of expenses or saving to put children through college, a term plan might provide all the coverage you need right now, ensuring your family’s protection during this critical time. Also, because term policies are more affordable, they are a good short-term fix until you are ready to upgrade to a whole plan and are easily the best option for those just starting out with life insurance.

Conversely, whole life insurance is preferable for planning your inheritance and your estate’s future. When the time comes, this type of plan will be far better suited to cover estate taxes. In addition, if you have a lifelong dependent relying on your income – a child with special needs, for example – a whole policy should be in place to provide financial support, especially if you don’t want to rely on retirement savings or other assets. If you can afford it, the more comprehensive protection offered by a whole plan is certainly the best way to plan for your long-term finances.

Decisions, decisions

Whether you go with a term or a whole plan, deciding on a life insurance policy is no easy task. All plans take into account your age, health and financial standing (i.e., debts, expenses and assets), and you need to anticipate any expenses that may arise for your beneficiaries in the coming years, such as education and housing. These are all major factors in making any policy decisions, and in the end, the most accurate way to determine which plan fits your budget and your expected needs is to compare the long-term costs of all your options.

Truth be told, life insurance offers such mutability that you have seemingly endless ways to fit a policy into your lifestyle. While we have isolated term and whole plans individually, oftentimes the best approach for consumers is to start out with term and convert it to a whole policy when the time is right. You could even purchase both at the same time, allowing you the opportunity to take advantage of the best aspects of each plan. It truly depends on your situation. Life insurance is a very personal topic to many and likely among the most subjective financial decisions one can make. Before you commit to any plan, consider reaching out to a qualified professional for assistance in assessing your options.

Do you have a term or whole life insurance plan, and why do you think this kind of plan is the best? Comment below with your thoughts.

Get an insurance quote today at AAA.com/QuoteNow.


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