Term vs. whole life insurance: how to choose

Before you choose a life insurance policy, it is important to understand the different options. There are two major types of life insurance: whole life insurance and term life insurance. Both whole life and term life insurance offer excellent coverage and specific advantages. Let's take a look at the differences between the two, so you can make an informed decision based on your needs.

What is term life insurance?

Term life insurance provides coverage for a specific term, or period of time. Terms can last 10, 15, 20 years, or more, depending on your specific policy. Term life insurance remains active as long as you pay your premiums and uphold the terms of the contract. This policy is designed to help financially protect your beneficiaries during the term of the contract, if you are no longer there to do so. The benefits from the policy can be used to help cover funeral expenses, pay monthly bills, fund education, or for any purpose the beneficiary chooses.

Term life insurance is designed to be less expensive than whole life insurance, with lower payments. This may be appealing to some families, as it may fit their current needs and resources. Most companies will allow policy holders to convert to whole life insurance if their term is about to end or their needs change.

If you outlive the terms of your policy and you do not transition to whole life insurance, you'll have to renew your term life insurance if you wish to remain covered. As you consider insurance coverage, keep in mind that not all policies are eligible for renewal. Also, some policies are based on your health and age at the time your coverage begins. So, renewing an eligible policy could cost you more than your original coverage. Additionally, your term life premium may increase as you get older.

Term life insurance is typically designed to work best for a limited time. Some people only need life insurance for a brief period. For example, sometimes parents will purchase term life insurance that will last only until their children become working adults. Homeowners might keep their term life insurance until they've made their last house payment. If they die before they have outright ownership of the home, the money paid out by their insurance could help ensure that their family could continue to make payments on the house.

What is whole life insurance?

Whole life insurance is designed to last the rest of your life, unlike term life insurance. That means that you won’t have to worry about renewing your coverage. Also, most life insurance companies will not cancel your whole life insurance if you develop health problems such as cardiovascular, behavioral, or blood disorders, to name a few. As long as you keep your payments up to date, your insurance will remain active. That could be a comforting thought if you worry your health may get worse with age.

If you don't make changes to your whole life insurance coverage, you most likely won't experience unexpected or sudden changes to your premium. Overall, you may spend more each month for whole life than term life, but in many cases, you'll be able to know the cost in advance.

Another reason some families choose whole life insurance is that it includes a cash account that gains interest. A small amount of the money that you pay each month is placed in a separate cash account for you. In time, it may be possible for you to borrow money from your account.

If you were to borrow from that account, the loan's interest rate will usually be lower than on a typical bank loan, but it's still important that you repay the loan as soon as possible. If you haven't repaid the loan at the time of your death, the outstanding loan balance and interest will be subtracted from the death benefit paid to your loved ones.

Which type of life insurance may be best for you?

Term life and whole life have distinct benefits. The coverage option that could be best for you and your family depends on your personal circumstances and budget.

Your first consideration may likely be budget. Lower payments may be what is feasible right now, and term life insurance is to designed to fit within those constraints. If your budget changes, you can convert to whole life insurance later. In the meantime, term life insurance will still offer important coverage to help protect your family.

While the premiums for whole life insurance may be higher, these policies may be the right choice if you also want to add cash value or if you have permanent dependents, such as adult children with disabilities.

Every family is unique. If your family needs life insurance coverage only until a house is paid off or until the children have finished school, then term life insurance may be the best option for you. If having fixed payments and coverage designed for the rest of your life is most important to you, whole life insurance may be the right choice.

Both term life insurance and whole life insurance pay death benefits to your family, which may help them cover bills and expenses after you pass away. We've highlighted the key differences between term life insurance and whole life insurance in the chart below.

Look for the features that are most important to you, then choose the life insurance that meets the needs of your family. Call or contact TruStage™ today to get started with the term life or whole life insurance of your choice.

*Some policies are subject to a two-year contestability period.