What Is the Difference Between Term and Whole Life Insurance?

If you are like many Americans, you may be unsure about the difference between term and whole life insurance. You may have heard about locking in your premium rate for a set number of years, or perhaps you know someone who “cashed out” their insurance, yet is still alive. Without a doubt, finding the cheapest insurance policies possible can be a confusing subject to master.

The main difference between term and whole life insurance is that term life insurance pays in the event that the insured person dies, but does not provide extra benefits like whole life insurance does. You cannot borrow against your term life policy, your premiums do not increase or decrease during the term you selected, and if you are still alive at the end of whichever term you selected, you and your beneficiaries get nothing. Basically, the policy pays out if and only if you die.

The benefit to term life insurance is that it is the most affordable option for most people. You should note, though, that the cost of a term policy increases if you choose a longer term. Still, there is a big cost difference between term and whole life insurance policies.

Another difference with whole life versus term life insurance is that whole life policies insure you for life and add an investment component, too. Some of your premium goes into stocks, bonds, or other investments, which ideally gain in value over time. Eventually, you may no longer have to pay your monthly premiums because there’s enough interest to cover their cost. You can also cash out your policy. The main disadvantage to whole life is that it is much more expensive than term life, and many people would be better off putting that money into other investment vehicles. Still, some people like the “forced savings” aspect.