Community Resource Federal Credit Union
Community Resource Federal Credit Union

Benefits & Drawbacks of Each

I am sure we can all agree that everyone’s life and financial goals are different. We have different needs to meet. So it is important to understand the difference between the two most common types of life insurance policies. Here is a simple guide to learn the basic differences and help you decide which option may be best for you.

Term Life

Term life insurance provides protection for a specific, limited amount of time. Most policies you get last 10, 15, 20, 25, or 30 years. Sometimes it can last to a certain age, such as 80. Typically, term life insurance provides no cash value but a benefit is it offers a lower premium. So if you can only make a smaller monthly payment, this may be your best option. Often, term life provides protection for specific times of need, such as a mortgage or raising a family.

Term life insurance is the most convenient policy option for people who are simply looking for a way to provide a financial safety net to their loved ones in case they die. Meaning, if you die during that term life period, your beneficiary, the person you have selected to receive the money when you pass away, will receive the death benefit – typically a lump sum of money – tax-free.

Benefits of Term Life

Term life insurance covers almost any type of death that is caused by illness or an accident and almost anyone has the ability to get term life insurance, even if you have a pre-existing condition or you are on a budget.

Term life is affordable, in fact, it is more affordable than most other life insurance policies. Term life can provide a financial safety net to your loved ones without being tied up in a complicated tax premium or payout.

Drawbacks of Term Life

The biggest and most obvious drawback of Term Life insurance is that it has an expiration date. If you still need life insurance by the time your term coverage expires, you will have to take out a new policy. Also, Term Life does not come with cash value. So, if you are a high earner seeking alternative investment options, or you have dependents who will need long-term care, a term policy is probably not the best fit for you.

Whole Life

Whole life insurance is designed to be with a person for their entire life – normally to age 120. A whole life policy has a cash value that accumulates over the life of the policy but with that comes a higher premium. So if you are on a fixed income for what you can spend monthly, this may not be the best choice for you. The cash value can be accessed if needed for any reason and can provide a guaranteed income after retirement. Whole life insurance is a type of permanent life insurance.

Benefits of Whole Life

As long as you have paid your premiums to keep your policy active, your Whole life insurance will not expire. This means that your beneficiaries will receive the death benefit payout regardless of when you die. The cash value that whole life policies have builds interest over time. This means that it offers a guaranteed rate of return that grows over time at a fixed rate. You can even access your cash value while you are still alive.

Drawbacks of Whole Life

The biggest drawback to taking out a whole life instead of a term life insurance policy is that the policies are five to 15 times more expensive. If you take out a whole life policy and find out down the road that you can not afford it, you risk leaving your family without protection. If you are only using whole life insurance as an investment vehicle this may not be your best option. There are other investment options that offer higher rates of return.

Sum It Up

The main differentiating factors between term and whole life insurance policies are the length of your coverage, the premium costs, and the cash value component. You need to think about what you need life insurance coverage for and for how long you need it.