The Pros and Cons of Temporary vs. Whole Life Insurance

In many cases, life insurance is more than just a security net for your loved ones. It can be a valuable financial investment if you understand what you could gain by choosing the right policy. In this guide, we'll answer the questions of what is term life insurance, and what is permanent life insurance, and explain the pros and cons of each. By the end of this article, you'll have a better understanding of how each type works and what type of policy could be best for you.

What Is Term Life Insurance?

Term coverage is set for a specific duration. The terms generally range from 10, 20 and 30 years. Those who buy this type of policy are looking for a small or moderate death benefit, generally between $50,000 and $100,000. The premiums are much lower than permanent coverage, so they're a good choice for someone who only wants to buy a policy to protect their family's immediate wellbeing after their passing. The death benefits left by term coverage from some providers can be up to $1 million, but the premiums will be higher.

Pros

Because this policy has a finite coverage period, you can use it to cover your family while your kids are still young or until you've paid off your home's mortgage. Once children are financially independent or they've acquired more money of their own, they may not be as concerned about leaving a large death benefit behind. The benefits, however, are tax-free, so you won't have to worry about your loved ones losing thousands of dollars before money reaches their hands. You'll also find that the premiums and initial costs for term life insurance are much lower than any type of permanent coverage.

Cons

The biggest downside to temporary life insurance is the lack of cash value. With permanent policies, a portion of your premiums go toward a cash value, which earns interest over time. This allows you to sell the policy at a later date and use the funds for your own personal advantage. Temporary policies' costs rise with each renewal, and they cannot be sold. When the term ends, the death benefit simply disappears, and you do not get your premiums back if you are still alive.

What Is Permanent Life Insurance?

A whole or permanent policy lasts throughout your life and can be bought by anyone 18 or older. Providers do often limit the maximum age you can apply for coverage, but its typically well into someone's 80s, so adults don't have to worry about being too old to get protection. A permanent policy can be universal or variable. Universal life insurance has a savings component that generates interest and builds a cash value. Variable coverage instead puts a portion of your premiums into an investment account. In both cases, the death benefit is the only amount your loved ones are entitled to, so the cash value is meant to be a form of investment that you surrender the coverage for later on.

Pros

Because coverage lasts a lifetime, there's more peace of mind with a whole policy. Benefits are also tax- free. If you sell your policy later, you can use the money to pay for anything. Many people use theirs to fund retirement, supplement income or pay off their mortgage. The money could also help you buy a new home or relocate to your dream retirement destination.

Cons

Higher premiums can make this type of insurance less accessible to those on a budget. While the cash value is a major advantage for someone who plans to sell later, it does not provide any benefit if you die beforehand. Cash values are only issued to the policyholder, which means that you gain nothing by choosing not to sell. You should only buy coverage that suits your family's needs, and those needs can change over time. Comparing quotes and determining the ultimate goal of your coverage will help you make the right final call.