Life Insurance: Should I Buy Term Or Whole Cover?
Buying life insurance policies is something that everyone should consider at some point in their lives. The question is whether to go for whole or term life insurance. Both policies can provide financial protection for your loved ones in the event of your death. In this article, we’ll explain the differences between these types of policies.
Why should I buy life insurance?
Life insurance is a type of financial protection policy that can provide income for your family after death. There are two main types of life insurance: term and whole life. Both of these policies pay out a cash lump sum to your loved ones when you die, supporting them during this difficult time
The main difference between the two policies is the length of time they last. For example, a term policy only lasts for a set period of time (for example, 20 years), whereas a whole life policy lasts throughout your lifetime.
The payout from a life insurance policy can help your family with future finances, such as:
- Living expenses
- Utility bills
- Funeral costs
- Mortgage repayments
- Outstanding loans or debts
Both term and whole life policies can help reduce any financial burdens placed on your family as a result of your death. Let’s take a look at how each of these types of cover work…
Term life insurance
A term life insurance policy provides coverage for a fixed amount of time, usually around 10-20 years. The policy pays out so long as you die within the agreed policy term. However, once the policy expires, your family will be unable to make a claim should you die at any point in the future.
There are 3 types of term life cover:
- Level term – The most common type of term life cover. With this type of cover, both the pay-out value and cost of your monthly premiums are fixed throughout the term. Buying at an early stage can help you lock in a cheaper premium rate.
- Increasing term – Designed to cover the eventual pay-out from inflation. Your pay-out increases over time to protect its value. However, your premiums may also arise as a result.
- Decreasing term – Used to cover larger payments that your family may struggle to cover alone, such as a mortgage. Your pay-out value reduces over time as you make repayments.
What happens if I outlive my term life insurance?
If you outlive your term life cover, the policy simply expires. Once this happens, you will no longer be covered, so if you die, your family will be unable to make a claim in the event of your death. If you still require life cover, you’ll need to take out another policy. Of course, if you have whole life insurance, you won’t need to as you are covered indefinitely.
Whole life insurance
Whole life insurance is different from term life insurance as it doesn’t expire. Instead, you are covered for the rest of your life. When you die, your insurer pays a lump sum to your family to help them during this difficult time. Whole life policies payout regardless of when you happen to die, guaranteeing your loved ones financial security for the future.
There are two types of whole life insurance cover:
- Standard – Both your premium costs and pay-out amount are fixed throughout the policy. This policy won’t lose value regardless of when you die, and won’t cost you extra for premiums as you get older.
- Maximum – Provides investment opportunities. Every month, your insurer invests the money from your monthly premiums to cover the eventual pay-out amount. If the investment succeeds, bonuses can be paid into your policy. However, if it fails, your premiums may be raised to cover the loss.
You can also get joint life insurance – ideal if you and your partner share responsibility for your household’s finances. Joint policies provide cover for two people under a single policy agreement. Joint life insurance typically pays out after the first death in the partnership.
Can you cash in a whole life insurance policy?
Depending on the Ts & Cs of your insurance agreement, it is possible to cash in a whole life insurance policy. This could be because you no longer need cover or can no longer afford to pay your monthly premium. How much you receive for cashing in your policy depends on the surrender value of your cover.
You typically receive much less for cashing in your policy than if a pay-out is triggered naturally. So although it’s possible, it should only be seen as a late resort. Should you choose to buy another policy later down the line, you may have to pay extra for premiums, depending on your age.
Which policy should I buy?
Whether you should buy a term or whole life policy depends on 3 key factors:
- How long do you want to be covered for: If you’re looking for permanent life insurance cover, then you should buy a whole life policy. However, if you’re only looking to buy cover for the near future, then a term life policy could be a better option.
- How much you can afford to pay for cover: If you’re buying life cover on a budget, then you should look more favorably on buying term life cover. But if the cost of your cover isn’t a concern, then a whole life policy will provide the necessary cover for your loved ones.
- What are you looking to cover (i.e. a mortgage or as a replacement for your income): If you want to provide a replacement of your income to your family when you die, or to leave behind for various costs, then whole life insurance is an ideal choice. However, if you’re looking to cover something specific, like a mortgage, then decreasing term life cover may be a better option.
Whatever type of life insurance you decide to buy, know that you’re protecting your family by reducing the financial burdens your death could inflict. If you’re ready to buy cover, head online to get a policy by applying for a quote.