Are you considering getting life insurance, but unsure about the difference between term and whole cover? Making the decision can have a big impact on your financial future and the well-being of your loved ones. We’ll look at the main differences, and why you might choose one over the other.

What is term life insurance?

Usually the standard option for most people. It provides cover for a set number of years, so ideal if you only need cover for a certain time. If the policyholder dies during this term, their loved ones will receive a payout. However, if the policyholder outlives the term, there is no payout.

What is whole life insurance?

With whole life insurance, the clue is in the name – it provides protection for the rest of your life, as long as you pay your premiums. This means that the policy will pay out regardless of when you pass away. Depending on the insurer, the policy can build cash value over time, which can be borrowed against or withdrawn if needed.

So what are the main differences between the two?

Cover

Term life insurance has 3 levels of cover:

• Level: Where the payout value remains the same throughout the term of the policy.
• Decreasing: Where the payout value decreases over time, usually in line with a mortgage or other debt that is being paid off.
• Increasing: Where the payout value increases over time to keep pace with inflation or changing circumstances.

Whole life insurance isn’t as straightforward. Some insurers may offer other levels of cover, others may not. Some policies include an investment component, where the money from your premiums is invested, potentially increasing the cash value of the policy over time.

Policy length

As we’ve already mentioned, each of these policies has different lengths of cover. When you take out a term life policy, you agree with your insurer on a specific term. One person may only want 5 years of cover, whereas someone else may want 30 years.

Whole life insurance, on the other hand, protects you for your entire life – but only as long as you continue to pay premiums. This can provide peace of mind, knowing that your loved ones will receive a payout whenever you pass away.

Your choice will depend on your individual financial situation and goals. If you only need coverage for a specific period, such as until your children are grown up or until you’ve paid off your mortgage, then term life insurance may be the better option for you.

Payout

When it comes to payouts, both types of cover can provide a cash lump sum when you die. However, it all works slightly differently depending on the policy.

With term life insurance, if you pass away during the term of the policy, your loved ones will receive a cash lump sum. Should the policyholder outlive the term, there will be no payout.

Whole life insurance guarantees a payout whenever the policyholder passes away, as long as premiums are up to date. This can provide more financial security for your loved ones, as they know they will receive a payout no matter when you pass away.

Premiums

Premiums for term life insurance can differ depending on your level of cover. With a level term policy, for example, the premiums stay fixed throughout the policy. Whereas an increasing term policy the premiums will rise over time.

Premiums for whole life insurance also remain fixed throughout the policy. If you have an investment-linked policy, the premiums may vary depending on the performance of the investments.

Cost

The cost of life insurance policies is usually determined by a select number of factors, including:

• Age
• Health
• Lifestyle (i.e smoking, drinking, occupation)
• Policy type
• Policy length
• Cover amount

In this case, the policy type is the main factor. Premiums tend to be more costly for whole cover compared to term, as you’re paying for permanent protection. That said, term life insurance offers cheaper premiums, but uncertainty as to whether the policy will pay out.

Thanks to the internet, getting cover online has never been easier. There are plenty of tools and calculators available to help you compare the cost of different policies and determine which one is best for your budget.

Reasons to buy whole life insurance

You’ll likely want to buy whole life cover if:

• You want life insurance cover for your entire life, not just a specific term.
• You want a policy that builds cash value over time.
• You want to ensure your loved ones receive a payout whenever you pass away.

Reasons to buy term life insurance

You’ll likely want to buy term life cover if:

• You only need cover for a specific period, such as until your children are grown up or until you’ve paid off your mortgage.
• You want cheaper premiums compared to whole life insurance.
• You are comfortable with the uncertainty of whether the policy will pay out.

Ultimately, the choice will depend on your individual financial situation and goals. But it’s never a bad idea to do your research before making any decisions. But regardless of which policy you choose, you’re doing the right thing by protecting your loved ones in case something unexpected happens.