Term Or Whole Life Insurance

You know you need life insurance. It's a way to provide financial protection for your spouse, children, or other dependents should you unexpectedly die. But knowing that life insurance is a smart move and knowing which type of policy to take out are two different things.

Studying up on life insurance isn't fun. Fortunately, most consumers choose between just two different types of life insurance policies — term and permanent. And if they choose permanent life insurance, they usually opt for what is known as whole life insurance.

What's the difference between the two? And which type of insurance is best for you? Here's a crash course in the difference between term and whole life insurance.

Term Life Insurance — The Cheaper Choice

For most people, term life insurance is the smart financial choice. That's because this insurance provides solid financial protection for loved ones, while also costing far less than a whole life insurance policy.

As the name suggests, term life insurance remains in effect for a certain period — or term — of time. You can choose the term, usually anywhere from one to 30 years. The Insurance Information Institute says that most people choose a 20-year term.

When taking out a term life policy, you'll provide a list of beneficiaries, such as your children or spouse. Your term life insurance will pay out your death benefit to your listed beneficiaries if you die — and your death meets the requirements spelled out in your policy during this term (suicide cancels a payout, for example). After the term ends, the policy ends, too, unless you pay to extend it. Your annual premium will usually remain the same during the term.

If you take out a term life insurance policy, you'll have to decide how long you want your policy to remain active. Most people choose a term that will last until their dependents no longer need their financial assistance. They might take out a term policy that lasts until their children will have left their home and started their own careers, for instance. Others might choose a policy that ends only after they know they will have paid off their home and built up a significant amount of savings.

How much you pay for term life insurance depends on many factors, including your age, health, the amount of coverage you want, and the length of your policy. TrustedChoice.com, a website that helps consumers find independent insurance agents, says that a healthy 35-year-old male nonsmoker who takes out a 20-year term life insurance policy with a value of $500,000 will pay an average of about $35 a month for a policy. A 35-year-old healthy female nonsmoker would pay about $61 a month for $1 million worth of life insurance with a 20-year term.

That comes out to $420 a year for the male and $732 for the female taking out the more valuable policy.

Whole Life Insurance

Whole life insurance is a more complicated product. That's because it is really two different financial products in one. It provides life insurance benefits like a term life policy, but also comes with an investment component known as a cash value.

Part of every payment you make goes toward growing this cash value on a tax-deferred basis, meaning that you won't pay taxes on any of these cash gains while they are growing. You can borrow against your life insurance account or surrender it at any time to take the cash that has grown in it.

You will, though, have to repay any loans you make against your whole life policy, with interest.

Whole life also lasts, as its name suggests, for your entire life. No matter when you die, a whole life policy will pay out its death benefits to your listed beneficiaries, as long as the cause of your death is covered under the policy. Your premiums will remain the same until you either cancel the policy or you die.

Because it comes with an investment component and lasts for your entire life, whole life insurance is considerably more expensive. TrustedChoice.com says that a healthy 35-year-old male who does not smoke would pay an average of $98.50 a month or $1,119 a year for a whole life insurance policy with death benefits valued at $250,000. A 35-year-old healthy female who doesn't smoke would pay an average of $82 a month or $960 a year for the same policy.

Which Is Right for You?

Which type of insurance is right for you? If you simply want to provide protection for your loved ones until they are financially independent, a term life insurance policy is usually the better choice thanks to their lower costs.

If you want a life insurance policy that also generates cash value, then you might consider the whole life version. Whole life might make sense, too, if you need to provide financial protection for a loved one who will be dependent on you for your entire life, such as a child with special needs.