Life insurance helps provide financial protection for your loved ones after you’re no longer around. That’s serious stuff. It’s a bit more consequential than picking between a pumpkin-spice latte or a decaf cappuccino..
We’ll lay out some of the pros and cons of both term and whole life, so that you can feel confident in making an educated decision.
Apply for term life insurance with Lemonade, starting at $8 a month
get free quoteWhat is term life insurance?
The principal advantage of term life insurance is that it is substantially less expensive and simpler than whole life insurance.
How does it work? Well, first you pick a period of time—a term. If you should pass away before the end of the term—as long as you’ve kept up with your payments—your insurer issues the payout to the beneficiaries you chose. That payment is also referred to as the ‘death benefit.’
The big thing to keep in mind is that term life covers you only for the term of the policy. If you have a ten-year term life insurance policy, and you live another eleven years, there’s no payout. In this way, life insurance companies are able to keep term life insurance affordable, since (yay!) most people outlive their policies.
What is whole life insurance?
The main bonus of whole life insurance, a type of permanent life insurance, is that it covers you for your entire life.
Life insurance companies will—with some exceptions—pay out the whole life policy’s death benefit when you pass, whether in five years or fifty years. Whole life plans also have other pluses, including that the insurance company invests a portion of your premiums in a tax-deferred cash-value component that bears interest at a rate determined by the insurer, so your policy builds cash value over time.
One of the big negatives of whole life insurance is that, depending on your age, health, and other particulars, the premiums could be five, ten, or even fifteen times higher than for term life insurance.
In addition, the cash value a whole life policy accrues is based on a guaranteed interest rate set by your insurer. But you could also consider purchasing a more affordable term life policy, and then investing the money you’re saving in things like treasury bonds or index funds.
Is term or whole life insurance right for me?
Choosing between term life insurance or a form of permanent life insurance is a very personal decision. Your best bet is to educate yourself—like you are right now!—and then take some time to mull over the best option for your own circumstances. Check out our ultimate guide to life insurance to take an even deeper dive into the particulars.
If you think that you can grow your money better than an insurance company can, then one option is to buy an affordable term policy and use the cash you save to invest. As we mentioned, you don’t have to be a financial wizard—it could be as easy as putting money in an index fund, and forgetting about it for three decades.
Some financial gurus have a mantra, in fact: ‘Buy term, and invest the difference.’ We’re a little biased, but we couldn’t agree more.
