Best term life rates. Term vs. whole life insurance, Which one should you buy?,

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We break down each type in plain English.

Life insurance can seem complicated. And when you’re choosing between term and whole life insurance, the decision can feel overwhelming.

Take a deep breath: We’re here to help. If you’re confused by all the fancy insurance terms out there, this guide will clear the air. Here’s the difference between term and whole life insurance, explained simply.

Term vs. whole life

What is term life insurance?

Term life insurance covers you for a specified period of time, typically with the option of renewing after that term.

Average terms come in increments of five — for instance, 5, 10, 15, 20, 25 or 30 years. Though you’ll find the rare company offering tailored terms, you likely won’t be able to sign up for a 12-year policy.

Here’s what you should know about term life insurance

It offers death benefits only.

Whole life insurance, meanwhile, offers death benefits and an extra investment account called cash value. We’ll talk more about this in a bit.

Definition: The death benefit is the money paid out by a life insurance policy when the policyholder dies. This money is paid to the beneficiaries — the people chosen to receive the death benefit.

It’s usually less expensive than whole life insurance.

Why? Simple: Your insurer is betting you’ll still be alive at the end of the policy term. If that’s the case, it won’t have to pay up. Your insurer saves money and charges you less.

You may be able to renew your coverage after your term ends.

Check with your provider to see if this is possible. If you renew your coverage, you’ll probably pay a higher premium.

Definition: Your premium is the money you pay to keep your insurance policy active. Usually, you’ll pay it monthly. However, many insurers will give you a discount if you pay it annually.

You can get term life insurance without a health exam.

However, your premiums will probably be higher because your insurer has no information about your health.

Your premium may change depending on the type of insurance you buy.

Cheap whole life insurance

There are three types of term life insurance: level term, decreasing term and annual renewable term insurance.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance — meaning it gives you lifelong coverage.

There are several types of permanent life insurance, including:

Variable life insurance

Universal life insurance

Variable-universal life insurance

Survivorship life insurance

Like term life insurance, whole life insurance offers death benefits. However, whole life insurance includes an investment account — the cash value component.

Cash value explained

Each time you pay your insurance premium, your payment is split between your death benefit and your policy’s cash value.

The money you pay toward the cash value goes into an investment account. Over time, those dollars will grow tax-deferred — that is, it won’t be taxed until you withdraw it.

Here are a few options you may have to leverage your cash value:

Take out a life insurance policy loan.

You’ll receive a loan from your insurer, and your policy’s cash value serves as collateral.

You can end your life insurance policy early and collect your policy’s entire cash value. If you choose this option, you give up your death benefit, which means your beneficiaries won’t receive money when you pass away.

You may be able to make insurance payments from your cash value. To do this with whole life insurance, your policy must usually be paid up.

Cancer insurance

What you should know about whole life insurance

You usually need to have a health exam.

Since your insurer will cover you for life, it wants an accurate assessment of your health.

You may be able to purchase insurance without having a medical exam.

This is no-medical-exam life insurance, also known as simplified issue. It typically comes with higher premiums. Also, you’ll probably have a death benefit below $50,000.

Your premium almost always stays the same.

With some whole life insurance policies, you’ll pay lower premiums early on and higher ones later.

At the beginning, it’ll be more expensive than term life insurance.

In the long run, however, it could save you money compared to term life insurance.

Which type of insurance should I buy?

Now that you know the difference between term life and whole life insurance, here are a few factors to consider before making your choice.

Always understand your policy before you buy insurance. Take your time before making a decision, and do your research before signing any agreement.

Consider buying term life insurance if…

You’re not ready to lock in your life insurance forever.

With term life insurance, you can choose how long you want it to last.

You want an affordable option right now.

Term life insurance generally costs less than whole life insurance — at least at the beginning. You might be surprised by the cost, which could be as little as $30 or $40 a month.

You want coverage only for the years you’re paying the bills.

Car insurance brokers

You may not need a large death benefit after your kids are moved out or you’ve paid off your mortgage. Getting term life insurance means you can reevaluate your policy closer to its expiration date.

You want a straightforward life insurance policy.

Term life insurance is relatively easy to understand. Whole life insurance can be more complicated, as you’ll want to evaluate it against other types of permanent life insurance.

Consider buying whole life insurance if…

You’re young and healthy, and your family has a history of serious diseases.

It may be a good idea to lock in your premium while you have no health complications. With a serious illness, your premium will increase significantly.

You don’t think you have the discipline to invest on your own.

A term life policy might save you money, which you can put in your own investments. However, you must grow your funds yourself or hire someone to do it for you. You’ll pay higher average premiums for a whole life policy, but your insurer will take care of the investing.

Many experts recommend considering whole life insurance as you near the age of 50. You may still be healthy and receive lower premiums. As you get older — and potentially develop health conditions — you may pay higher premiums.

Bottom line

When choosing between term and whole life insurance, never feel you have to rush into a decision. Carefully analyze your financial future: bills, family situation and health.

Term life insurance can be helpful if you have a solid plan for how you’ll cover your obligations when your policy expires. If you think your premiums may increase significantly in the future, it may be worth spending more on whole life insurance.

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