This blog serves as a vehicle for changing the stigma that surrounds life insurance. We are always explaining the depths of life insurance on our monthly podcast, but you can check in here to learn anytime! Today on the blog we wanted to take a little step back to basics and take you on an overview of two kinds of life insurance, to help you better understand how to make the right decision for yourself on this vital purchase. We aim to answer some questions like:
What is term life insurance?
What’s whole life insurance?
How similar are they?
How different are they?
You’ve probably asked yourself, “Is term or whole right for me?” Short Answer- It very much depends on your situation though, so please reach out and discuss with MBK & Associates, but let’s break it down a bit for you!
What is term life insurance?
First things first, in order to describe their differences, we’re going to need to do a brief overview of what each is. Up first is Term Life Insurance. Term life insurance is pretty straightforward, you pay for coverage extending a certain period of time. Some common numbers might be 10 or 20 years.
If you die during the coverage term, the policy pays out. If you outlive the policy and your coverage ends, then your beneficiaries don’t receive a death benefit. In most policies, the death benefit and insurance premiums remain the same throughout the life of the contract.
Typically, the length of coverage for your term life insurance should match the financial obligation being covered. For example, young parents may consider a 20-year plan to have a safety net for their children. If you’re buying life insurance to cover your mortgage, you’ll want it to be close to the length of that. No reason to buy a term life insurance that expires with time left on the mortgage payments if that’s the goal of buying the policy.
What’s whole life insurance?
Whole life, on the other hand, does not have a set term. As the name implies, assuming you keep paying premiums, it will last until you die. Whole life is by far the most common permanent life insurance and offers an investment component. Due to the fact is doesn’t have an expiry date and offers a cash-value account, the premiums are much higher than term insurance.
Whole life insurance is more complicated than term insurance, but not by a huge margin. Premiums remain the same as long as you live, the death benefit is guaranteed, and the cash value grows steadily.
What is a cash-value account?
A portion of your monthly premiums are paid into this account, which earns interest and grows tax-deferred. Once you’ve paid into the account enough, you can borrow against the cash value or surrender the policy for cash. Keep in mind, there may be penalties for surrendering the policy. You can also withdraw money from it tax-free, but make sure to not use the whole pot and leave nothing for your beneficiaries!
Whole vs Term Life Insurance: A Quick Feature Rundown
Term life has some features that whole life doesn’t offer, such as specified length and low premiums. The two also share some features, like guaranteed payout (if you die during the term), and typically flat premiums. Features exclusive to whole life are an accumulated cash value, lifelong coverage, and potential annual dividends.
| Features | Whole Life | Term Life |
|---|---|---|
| A specific length of the policy | No | Yes |
| Typically flat premiums | Yes | Yes |
| Guaranteed payout (during coverage) | Yes | Yes |
| Lifelong coverage | Yes | No |
| Low premium | No | Yes |
| Could offer annual dividends | Yes | No |
| Accumulates cash value | Yes | No |
We won’t recommend one policy over the other as both are good options for different situations. Plus, many term policies can be converted into permanent ones. Please reach out to Mark with any questions regarding life insurance. We talk at length about how many of the newer plans, or programs we have to offer can really make a difference in your income at retirement!
Reach out!
We want to make sure you’re as comfortable with your situation as possible. Make sure to tune into our podcast, The MBK Beat! We work with individuals from just about every industry imaginable, and love working with business owners who aren’t afraid to plant their flags. We want to help people in ensuring their money is properly managed, it’s in the right places, and their families are safe in case of emergency. If it’s been a minute since you checked in about your insurance policy, it’s time to drop us a call or fill out a contact form to discuss your future.