When searching for a life insurance policy, you will come across many types of policies that each have different purposes. The main two types of life insurance policies are whole life insurance and term life insurance.
Whole Life vs. Term Life Insurance
A whole life insurance policy is exactly as it sounds. This policy lasts as long as the policyholder lives and pays out benefits once they pass away. On the other hand, a term life insurance policy only lasts a set number of years, such as 10, 20 or 30 years.
Another difference between these policies is that a whole life insurance policy can offer cash value, which allows the policyholder to withdraw a certain amount of accumulated cash from their policy. Term life insurance policies do not allow this, in part because they usually do not have long enough terms to accumulate significant cash value.
So, what is the point of a term life insurance policy? Why would you not choose a whole life insurance policy?
There are many reasons someone may choose a term life insurance policy instead of a whole life insurance policy. One is money. A whole life insurance policy, especially a cash value policy, is generally more expensive. A term life insurance policy allows you the same type of coverage for a lower price during a shorter amount of time.
One of the biggest benefits of a term life insurance policy is that some people only want coverage until they have paid off certain debts. The purpose of a life insurance policy is to provide for your family financially after you pass away. Some people may have families that are relatively stable when it comes to finances, but don’t want to saddle them with expensive debt. If you are working to pay off a shared mortgage, car loans, student loans, medical bills or other expenses, any left-over charges will fall to your loved ones if you pass away before they are paid.
A term life insurance policy allows you to purchase a policy for the time it takes you to pay off your loans or debts. So if you are paying off a large debt, you can purchase a term life insurance policy for 10 years. Within these 10 years, you can pay off your debt. If you pass away before the policy ends or before you pay off the debt, the life insurance policy can help your loved ones handle the costs.
Also Read: Should You Renew Your Term Life Policy?