Should I buy term or whole life insurance?

Term life insurance and whole life insurance are two different types of life insurance policies that serve distinct purposes and have unique features. Here’s a breakdown of the key differences between them:

  1. Policy Duration:
    • Term Life Insurance: Term life insurance provides coverage for a specified period, known as the “term.” Common term lengths are 10, 20, or 30 years. If the insured person dies during the term, the policy pays out a death benefit to the beneficiaries. If the insured survives the term, the policy typically expires, and there is no payout.
    • Whole Life Insurance: Whole life insurance, also known as permanent life insurance, provides lifelong coverage. As long as the premiums are paid, the policy remains in force throughout the insured’s lifetime.
  2. Premiums:
    • Term Life Insurance: Term policies generally have lower premiums than whole life insurance for the same amount of coverage, especially for younger and healthier individuals. Premiums are usually level (i.e., they remain the same) for the duration of the term but can increase substantially when the policy is renewed at the end of the term.
    • Whole Life Insurance: Whole life insurance typically has higher premiums than term insurance for the same amount of coverage. These premiums are designed to remain level throughout the policyholder’s lifetime.
  3. Cash Value:
    • Term Life Insurance: Term policies do not accumulate cash value. They are pure insurance and do not offer any investment or savings component.
    • Whole Life Insurance: Whole life policies have a cash value component. A portion of the premiums paid goes into a savings or investment account, which grows over time. Policyholders can access this cash value through loans or withdrawals.
  4. Investment Component:
    • Term Life Insurance: Term policies do not include an investment component. The focus is solely on providing a death benefit.
    • Whole Life Insurance: Whole life policies combine insurance with an investment component, often in the form of a savings account or investments in bonds and stocks. The cash value component has the potential to grow over time, and policyholders may receive dividends or interest on this component.
  5. Cost:
    • Term Life Insurance: Term insurance is more affordable initially, making it suitable for individuals who primarily want coverage for a specific period, such as while raising a family or paying off a mortgage.
    • Whole Life Insurance: Whole life insurance is more expensive, but it provides lifelong coverage and an investment component. It can be seen as a long-term financial planning tool, with a forced savings element.

The choice between term and whole life insurance depends on your financial goals and needs. Term insurance is often chosen for its affordability and simplicity, while whole life insurance is selected by those who want lifelong coverage and are willing to pay higher premiums for cash value and investment benefits.