Understanding Term and Whole Life Insurance

Life insurance is a crucial part of financial planning, providing financial protection for your loved ones in the event of your death. However, choosing the right type of life insurance can be challenging. The two main types of life insurance are term life and whole life insurance, each with its own set of benefits and drawbacks. In this article, we’ll explore these differences to help you make an informed decision.

What Is Term Life Insurance?

Term life insurance pays a death benefit to your beneficiaries if you die while the policy is active. Policy lengths, known as terms, typically last from one to 30 years. When the term is up, coverage ends. If you still need coverage, you may be able to renew your policy—though likely at a higher cost—or purchase a new one that better meets your current needs.

Pros of Term Life Insurance

• Cost: You can purchase a significant amount of coverage at relatively low rates—especially if you’re young and healthy.
• Simplicity: Term life insurance has only one component: a death benefit that will not change. If you opt for a level term, your premium stays the same as long as you own the policy.

Cons of Term Life Insurance

• No lifetime protection: Term life insurance coverage ends when the term is up.
• No cash value: Whole life insurance policies have a cash value you can use while you’re alive. Term life insurance doesn’t—it only has a death benefit.

What Is Whole Life Insurance?

Whole life is a type of permanent life insurance that provides lifetime protection and offers both a death benefit for your beneficiaries and a cash value account you can use while you’re alive. Part of your premium goes toward the policy’s death benefit, and part is deposited into a savings account that grows tax-deferred at a guaranteed rate.

Pros of Whole Life Insurance

• Lifetime protection: Whole life insurance provides coverage for your lifetime as long as you keep up with your premium payments.
• Cash value: Whole life insurance policies have a cash account you can use to pay your premium or other expenses during your lifetime.
• Dividends: Some whole life insurance policies may pay dividends that can boost your savings even more.

Cons of Whole Life Insurance

• Cost: Whole life insurance can cost six to 10 times more than term life insurance, according to Guardian Life.
• Complexity: The terms and conditions of whole life insurance are typically more complex than term life. It’s important to read your policy carefully to understand how it works.
• Cash value: If money is in the policy’s cash value account when you die, the insurance company gets to keep it.

Which Is Better, Term or Whole Life Insurance?

There’s no one-size-fits-all solution for purchasing life insurance. The type of plan that’s best for you depends on your unique circumstances and what you want to achieve with the coverage.

Term life insurance is usually better for younger people with dependents who don’t need lifetime financial support. You can purchase a significant amount of coverage at relatively low rates—especially if you have no serious underlying health conditions—giving your loved ones the financial protection they need if something happens to you. Ideally, the expiration date of the policy term will be after your children are grown, self-sufficient, and no longer need monetary support.

Since the cash value growth rates in a whole life policy are low—usually around 2% to 4%—you may get more long-term value from purchasing term life insurance and investing the cash you’d save on the premium than using a whole life policy as an investment vehicle.

Whole life may be worth considering for those who have maxed out their tax-advantaged retirement and health savings options and can afford the policy. The tax-deferred growth and guaranteed return may be more appealing compared to riskier options, and the cash value can supplement your retirement income. The policy’s lifetime coverage may also be a good option for someone who wants to leave an inheritance for their loved ones or care for dependents with special needs who require lifelong care.

How to Get Life Insurance

Applying and getting approved for life insurance may take several weeks. Here’s a brief overview of the process:

1. Decide which type of policy is best for you: Before applying for coverage, weigh your options and choose the type of policy you want to buy.
2. Determine how much coverage you need: The amount of coverage that’s right for you depends on multiple factors, including your income, number of dependents, current living expenses, debt load, and future expenses you want your policy to cover.
3. Get multiple quotes: Comparing rates from more than one provider can help you get the best possible price. You may be able to get quotes online, or you can work with a broker who can shop around for you and help you compare features and rates from multiple companies.
4. Apply: You’ll need to provide the insurance company with information about your lifestyle and medical history, including your age, gender, weight, pre-existing health conditions, family health history, occupation, and more.
5. Get a medical exam: Many life insurance policies require applicants to undergo a medical exam to assess their risk of premature death. If the insurer requires a medical exam, they’ll typically send a practitioner to your home.
6. Purchase your policy: You’ll find out if your application was approved or denied and receive your final rate. You may accept or decline the offer. If you accept, you must make a payment before the policy will be active. Be sure to understand waiting periods and other policy details that may affect the payout your beneficiaries receive, including what can result in a canceled policy.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand that choosing the right life insurance policy is a significant decision. Our team of experts is here to help you navigate the complexities of life insurance and find the best coverage for your needs. Call us today at 213-732-3074 for personalized assistance and to learn more about our mortgage services. Let us help you secure your financial future.