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According to a recent LIMRA and LIFE Foundation study, more than 50 percent of American respondents overestimated life insurance costs by three times or more than the actual amount. Most policies average between $40 and $55 a month, depending on the coverage type. This discrepancy in cost expectation can lead to putting off coverage or dismissing life insurance as an unaffordable luxury exclusively for the wealthy.   

Life insurance provides a financial safety net for your family in the event of an untimely death. If you need coverage, the two primary options are whole and term life insurance.  

Whole vs. Term Life Insurance 

Are you trying to decide the best fit for your family’s needs? Here’s a synopsis of each type of life insurance coverage.

Whole Life Insurance Explained 

Whole life insurance, also known as traditional life insurance, offers permanent coverage for the insured person — as long as their premiums are paid on time. Additionally, whole life insurance includes a savings component called “cash value” that accrues interest at a fixed rate on a tax-deferred basis. 

According to the Insurance Information Institute (III), whole life insurance is the most pervasive type of permanent life insurance. 

Benefits of Whole Life Insurance 

  • Guaranteed payout: Whole life insurance includes a guaranteed death benefit, as long as the account is in good standing.
  • Fixed premiums: No matter what type of life insurance, you’ll be required to make monthly payments. However, whole life insurance has fixed premiums. The monthly payment stays the same throughout the policy’s entirety. 
  • Cash value: Whole life insurance builds cash value. This feature means that a percentage of each payment is set aside and added to the policy’s cash value, accumulating throughout the policy’s duration. Some companies allow policy owners to withdraw funds or borrow against their cash value. 

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Term Life Insurance Explained

Term life insurance provides coverage for a set amount of time, usually one, five, 10, or 30 years. If the insured outlives their policy, their beneficiaries won’t receive any money. That said, the policy owner can terminate, renew, or convert their policy to permanent coverage once it expires.

The III points to a couple of different types of term life insurance. Level term life insurance offers a fixed death benefit. While decreasing term life insurance reduces potential death benefits as the policy ages. 

Benefits of Term Life Insurance 

  • Affordable: Term life insurance is usually more economical than whole life insurance. This disparity is because, with term life insurance, the policyholder’s coverage is for a limited predetermined time. 
  • Flexible: Term life insurance is also adjustable. Policyholders can choose how long they’d like their term insurance to last — whether it’s one, five, 10, or 30 years. 
  • Tax-free death benefit: If the insured dies during the policy term, their beneficiary or beneficiaries will receive a tax-free lump sum from the insurance company. 

How to Choose the Right Type of Life Insurance 

Life insurance isn’t one-size-fits-all. Before you make a final decision, do some research. Think about what kind of coverage you need, why, and how long you need it. Educating yourself is the best way to make an informed choice. 

A term life policy is probably the best option if you’re interested in affordable coverage for a specific period. However, if you’re comfortable paying a higher premium and are interested in another investment tool, you may want to look into a whole life insurance policy.