The difference between term and whole life insurance is an important one to understand. Without understanding the difference between term and whole life insurance, you won’t be able to tell whether you are properly insured, under insured or over insured.

Temporary needs

The key to understanding the difference between term and whole life insurance comes down to temporary versus permanent coverage. Term insurance is in place for a specific period of time, or term. You can get term insurance ranging from five years to 30 years in some cases. Once the specified term expires, your coverage goes out the window.

Now, there are several riders you can add to your term insurance contract that will modify your coverage, but each rider usually makes your coverage a bit more expensive. One beneficial rider is the guaranteed renewal rider. With this kind of rider when your term expires, your insurance contract will automatically renew itself. This type of insurance coverage can be beneficial if you have a temporary insurance need, but aren’t exactly sure how temporary.

The most common use for term or temporary insurance is to replace the “mortgage insurance” your bank tries to sell you (and often succeeds). Term insurance is an excellent replacement for the bank’s mortgage insurance because when you use term insurance your coverage never decreases and you have control over how to spend the payout.

Permanent needs

Whole life insurance is often recommended for permanent needs, such as final expenses and income replacement at death. Usually, whole life insurance will come with a premium and death benefit that remains level for the entirety of the contract. Also, the insurance policy will build up a cash value that operates as a reserve. The cash value of the policy will usually end up equalling the death benefit if the insured individual lives to 100.

The two most common types of whole life insurance are participating and non-participating. With participating (or par) whole life insurance, any profits derived from the policy are refunded to the policy holder in the form of dividends. Non-participating whole life insurance does not offer this kind of refund. While insurance companies often argue this cash value is a benefit, others consider it a form a forced payment.

Whole life insurance isn’t the only form of permanent coverage. There is also universal life insurance, but it is often expensive and complicated. The most affordable form of permanent insurance coverage is term to 100. Term to 100 coverage often blurs the difference between term and whole life insurance.

Term to 100 (T100) coverage is a stripped down version of whole life insurance. It does not build up a cash value and this means the premium will be cheaper.

Most properly insured people have term insurance to coverage any mortgage that exists and a form of whole life insurance. I’ve been progressing through the various stages of financial well-being. When you are trying to get your finances in order, first you need to develop a small emergency fund. Then you need to start your debt snowball.  Once you’ve paid off your high-interest debt you need to increase your emergency fund so that it can cover a few months worth of expenses. These are the basics, the very bottom level of your financial pyramid. Included at the most basic level is proper life insurance. Once you are properly insured, have enough savings and reduced your debt, you can move on to the next level in the financial planning pyramid – saving for retirement.

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