Purchasing life insurance allows you to provide your dependents with a financial safety net if something uneventful happens to you. However, the process of purchasing life insurance can be quite confusing if you aren’t familiar with the types of life insurance and how they differ. Fortunately, most people choose between term insurance and whole life insurance. Keep reading to understand how these policies differ and which one you should opt for.
What Is Term Insurance?
As the name suggests, a term insurance policy remains in effect for a particular period of time, usually between 5 and 30 years. The policy offers life coverage to the policyholder, meaning your beneficiary will receive a payout from the insurance company if you pass away.
- Cost: Term insurance policies cost a lot less than whole life insurance policies. The exact cost of the policy will vary based on factors like your health, the amount of coverage you require, your age, and the policy term.
- Tenure: A term insurance policy covers you for a specific period of time. Most people who purchase term insurance opt for a term that matches their employment period or until their dependents are financially independent.
What Is Whole Life Insurance?
Unlike term insurance, whole life insurance stays in effect for the duration of your lifetime. So, your beneficiary will receive a payout whenever you pass away. Also, the policy also works as an investment tool and develops cash value.
- Cost: Because a whole life insurance policy also has an investment component, they are usually more expensive than term insurance plans.
- Tenure: A whole life insurance lasts as long as you live, which makes it a great choice if you need continued coverage even after you retire.
- Cash value: A part of the premium you pay for your policy is redirected towards the cash value, which grows on a tax-deferred basis. You can borrow against this cash value or surrender your policy at any time and withdraw the cash value.
Which One Should You Purchase?
For most people, a simple term life insurance policy will suffice. However, if you also want to build cash value through your policy, a whole life insurance plan may be a better choice. Ensure that you take your financial situation and premium payment ability into account when deciding which type of policy to purchase.
