Life insurance is a form of insurance purchased to shield your family from loss of income after you or a loved one passes away.
There are two kinds of life insurance: term and whole. Designed for people who can’t afford whole life protection, term life insurance is designed to be more affordable over short intervals. It has a guaranteed death benefit, but no cash value. Whole life insurance is designed to be a longer-term solution. Once you’ve been approved for coverage, your policy is locked in for life—provided you pay your premiums. Whole life policies build cash value over time, which you typically can borrow from to pay for a home, education, and more.
How does life insurance work?
Term life insurance is straightforward—you pay a set amount monthly, and if the insured dies within the defined term (between one and 30 years), the named beneficiary(s) receives the death benefit. If the insured remains alive once the term expires, nothing is paid or recouped.
Whole life insurance is more robust in its features and benefits. It has a built-in savings element, meaning that your monthly premiums accrue into cash value. While the premiums are higher than those of term life insurance in the beginning, as the insured ages, typically you will eventually pay less monthly than you would for term insurance.
Benefits and risks of life insurance
Most people can benefit from some form of life insurance. Even young, healthy people often choose to buy it to protect their family from unexpected death. The younger demographic can also lock in lower rates, although premiums may increase over time.
Purchasing life insurance may seem like an easy decision—no one lives forever, right?—but there are certain pitfalls all potential buyers should avoid. If you get the wrong type of life insurance or don’t switch over from term to whole when your premiums start to increase, you can end up losing money over the long term. For example, if you get term life insurance when you’re 45, you’re likely to outlive the term. When the term is over, you may pay significantly higher premiums to purchase a new life insurance policy.
Life insurance considerations
Choosing between whole and term life insurance will have everything to do with your goals for life and how much money you make. Before agreeing to anything, make sure you’ve fully explored your coverage objectives. Are you looking for a less expensive and temporary solution, or something more robust? Who is your beneficiary and what would he or she need if you’re not around? Do you want your life insurance to also act as an investment product? All are important questions to consider when deciding which type of life insurance to purchase.