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Term life insurance
Term life insurance lasts for a number of years before it expires. If you die before the term is up, a set amount of money, known as the death benefit, is paid to your designated beneficiary. Term insurance is considered the simplest, most accessible life insurance policy.
When you make your payments (known as your premiums), you’re paying for the death benefit that will go to your beneficiaries when you are gone. The death benefit can be paid out as a lump sum, a monthly payment, or an annuity. Most people elect to receive their death benefit as a lump sum.
Term life insurance policies are more affordable than other types of life insurance policies and generally have lower premium costs. The average monthly premium payment for a 20-year, $500,000 policy for a healthy 35-year-old female is $24.39.
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Whole life insurance
Whole life insurance, on the other hand, is a type of permanent life insurance because it does not expire. It has a death benefit and a cash value, which is an investment-like, tax-deferred savings account that is included in the policy. The cash value accrues interest at a predetermined fixed rate. Each month, a certain portion of your premium will go into the cash value of the policy, which offers a guaranteed rate of return (the exact amount that goes into savings is determined by your individual policy). The policy’s cash value grows over time and can be withdrawn when it accumulates enough value or is used for a loan.
A whole life insurance policy can cost five to 15 times as much as a term life policy for the same death benefit amount, according to data in January 2021.
Whole life offers lifetime coverage as long as you pay the premiums. However, the cash value component makes whole life more complex than term life because of surrender fees, taxes, interest, and other stipulations.
Whole life insurance may be worthwhile if you need the cash value to cover things like endowments or estate plans, or if you have long-term dependents such as children with disabilities.