Whole life and term life insurance are two very distinct and different types of insurance and financial products. It’s important to understand the difference between whole life and term life. There are many differences and costs that you need to understand.
Difference Between Whole Life and Term Life Insurance
What Is Whole Life Insurance?
Whole life is more of an investment for many people who buy those types of policies. Whole life insurance builds cash value while you’re paying those premiums. Eventually, after years of premium payments, you build up a cash value in the policy that often gives you many options.
The cash value becomes an asset itself. It can grow, increase in value, and even pay dividends in some cases depending on the type of policy you purchase. Many whole life insurance policies let you borrow against the cash value you’ve built up, cash out completely, or even build up enough cash value where it can make your premium payments for you.
And your would-be broker will mention all of these fine features when he tries to convince you to buy a policy. It’s not just insurance. It’s an investment.
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What Is Term Life Insurance?
This accrual of cash value is the primary reason that whole life insurance policies are more expensive than term life insurance policies, which do not build any cash value. Term life insurance only covers you for the length of the term you’ve bought the policy — and for as long as you make the payments.
When the term is over (or you stop paying), you have nothing to show for it. Unless you die and your heirs collect the policy, it simply expires, and you would have to purchase new coverage if you want it.
So, if whole life insurance has inherent value and is more an investment than an insurance plan, why don’t more people buy it? Probably because life insurance is often a poor investment. While it produces a low but steady annual return, other types of long-term investments often outmatch the gains you can earn from it.
Find out more about the difference between whole life and term life and see the rest of the story on AOL Daily Finance.
Note: This article originally appeared on AOL Daily Finance and is reprinted with permission. See the full article on AOL Daily Finance.