What the Difference between Whole and Term Life Insurance?

A life insurance policy pays a lump sum amount to a designated beneficiary after a person’s death. While they are alive, they pay premiums every month or once a quarter to the insurance company. These payments are made over time. The purpose of the life insurance policy is to cover funeral expenses. Some people also want to provide their loved ones with money too. With some life insurance lincoln ne policies, a person can use some of the money while they are alive.

What is a Term Life Insurance Policy?

A term life insurance policy provides an individual coverage for a specific period. Sometimes a term life insurance policy is referred to as a pure life insurance policy because it was designed for parents wanting to protect dependents. For example, a parent with small children would obtain a term life insurance policy. The purpose is to financially provide for their children if the parent dies.

This type of policy is for anyone who wants the peace of mind of knowing their expenses are paid after their death. A term policy generally lasts for 10, 20 or 30 years. The monthly payment never increases. After the term ends, the policy expires.

The policy only has value unless the person dies. Their beneficiary is paid, and the funeral expenses covered. However, a whole life insurance policy provides more options.

What is a Whole Life Insurance Policy?

A whole life insurance policy provides coverage throughout a person’s life. It includes an investment option called policy’s cash value. As the cash value increases in value the longer the person has the policy. Cash value is tax-deferred. This means the person isn’t responsible for paying taxes while the cash value grows

A whole life insurance policy allows the individual to borrow against the policy. This means they can take a loan out against the policy and repay it later. If the loan isn’t repaid, the death benefit is reduced according to the outstanding amount owed.

Another huge difference between a whole and term life insurance is the annual dividends. Some whole life policies earn annual dividends. Dividends are like earning cash back when using a credit card. The person can let them accumulate and earn interest. They can use the dividends to decrease their monthly premiums, buy additional coverage or repay money borrowed against the policy. The individual takes the dividends in a check for personal use.

Deciding the Type of Life Insurance Policy to Get

No one is required to have a set amount of life insurance. They can obtain as much or as little as they believe is needed to pay for their funeral and burial. A term life insurance policy is like renting an apartment. It doesn’t have value if the person needs to invest or borrow money. However, a whole life insurance policy is like buying a house. The person is making a long-term investment with options to accumulate dividends or borrow against the policy.