Term Life vs. Whole Life Insurance: What’s the Difference?

Term Life vs. Whole Life Insurance: What’s the Difference?

Already Have Life Insurance Through Work? Read This First.

Here's where I see people get a little sticker shock. You look at the life insurance available through your employer and think, “Wow, that's cheap!” Then you look at an individual policy and think, “Wait a minute…why does that cost so much more?” There’s a reason. With group life insurance, the insurance company is covering a whole group of people, so the risk is spread across the group. Individual life insurance is based on you, including factors such as your age, health, and other risk factors.

But here's the part I really want you to think about: your job isn't necessarily permanent, and neither is that employer coverage. Employer life insurance typically ends when you leave your job, although some policies may offer options to continue or convert the coverage.

That doesn't mean you should ignore your employer's life insurance. Take advantage of it if it's available. But don't automatically assume it's all the life insurance you'll ever need. Insurance rates are based on factors such as age and health, so the longer you wait to look at your own coverage, the greater the risk of paying higher rates. You may not need to replace your employer coverage completely, but having coverage you own can give you protection that isn't tied to your job.

Now let's talk about the two types of life insurance you'll hear about most often: Term Life and Whole Life. They're both designed to provide a death benefit to your beneficiaries, but they work very differently.

Term Life Insurance: Coverage for a Set Period

Think of term life as life insurance for a specific period of time. You might purchase a policy for 10, 20, or 30 years. If you die while the policy is in force, your beneficiaries generally receive the policy's death benefit. If the term ends while you're still living, the coverage generally ends unless the policy allows you to renew or convert it to another type of coverage.

One reason people consider term life is cost. Term insurance is generally less expensive than permanent life insurance when you first purchase it, making it a way to obtain a larger amount of coverage for a particular period of your life. For example, someone raising children, paying a mortgage, or trying to replace their income may want substantial coverage during the years their family depends on them financially.

The tradeoff is that term insurance is designed to cover a period of time rather than your entire lifetime, and it generally does not build cash value.

Whole Life Insurance: Coverage Designed to Last

Whole life is a type of permanent life insurance. Instead of covering you for a specific term, it is designed to remain in force for your lifetime as long as the policy requirements are met and premiums are paid.

Whole life insurance also has a cash-value component that can build over time. Depending on the policy, that cash value may be available through loans or withdrawals. However, using the cash value can affect the policy's value and the amount ultimately available to your beneficiaries, so it's important to understand how your particular policy works.

Because whole life provides permanent coverage and includes cash value, it generally costs more than term life insurance. That doesn't automatically make it better or worse—it simply means it is designed to do something different.

So, Which One Is Right for You?

And here comes everyone's favorite insurance answer: It depends. 😂

There isn't one type of life insurance that is right for everybody. Your age, health, budget, family situation, how much coverage you need, and what you want the insurance to accomplish all matter.

Someone who wants affordable coverage while raising a family may have very different needs from someone who wants permanent coverage for final expenses or other lifelong needs. And someone who already has employer coverage may want to consider whether that coverage is enough and what happens to it if they change jobs.

That's why I don't believe in simply throwing a policy at somebody and hoping they understand it later. Life insurance is something you should understand before you buy it.

Whether you're looking at term life, whole life, or simply trying to figure out whether your employer coverage is enough, start with the questions that matter to you.

If you have questions about life insurance or want to look at your options, visit http://www.lissaruffin.com

I'll explain it until it makes sense.