Life insurance is a type of personal insurance policy that ensures your beneficiaries (your family) receive the agreed amount of payout when you pass away. In other words, the death benefit. This can be a grim topic to discuss, however it is an important financial responsibility you need to take on especially when you have a family.
When you die, you want to make sure that your family is financially accounted for so that they can continue with their lives without stressing about mortgages, car loans, as well as college tuition costs. The death benefit replaces your income when you can no longer support them.
Generally, there are two types of life insurance policies; term life insurance (TLI) and whole life insurance (WLI). In this article, we’ll be taking a look at the differences between TLI and WLI.
Period of Coverage
The biggest difference between TLI and WLI is the period of coverage. As the name suggests, TLI is temporary. Some insurance policies offer coverage from 10 years all the way up to 35 years, usually with 5 year intervals.
If you’re 30 and sign up for a 20-year-policy, it will expire when you’re 50. The day after your 50th birthday, you’re no longer covered and will need to renew or look for another insurance policy.
With WLI, you’re set for good. You wouldn’t need to worry about renewing your life insurance policy as you would with TLI. This means that the policy doesn’t expire for as long as you pay your premiums.
TLI is more cost effective compared to WLI especially if you’re young. The older you are, your risk to the insurance company is higher and you’ll need to pay a higher premium. However, most people still prefer going for TLI as it’s still an affordable option even when you opt for it at an older age.
WLI is expensive, mainly because part of your premium will contribute to your policy’s cash value. A benefit to WLI is that your premiums stay level for your whole life, so the price you pay at 40 will typically be the same as what you pay when you’re 70. In a sense, you’re pre-paying the hefty costs of insurance as you get older at a younger, lower-risk age.
On average, a 30-year-old male would pay only $20 a month for a 20-year TLI policy covering $500,000. For a WLI policy, he could spend at least ten times more a month!
You might think cash value is a good thing, but that’s not necessarily the case when you consider what you’re paying for. Think of it as a small investment vehicle within your policy in which you can withdraw money from for some interest repayment.
TLI does not store any cash value. What you’re paying for goes only to your death benefit (and administration, commission, and taxes)
WLI has cash value. However, only you can withdraw from it when the policy is still active. When you die, your beneficiaries will only receive the death benefit, and the cash value will be absorbed by the insurance company. Not a great deal for most people!