A mortgage is one on of the most compelling reasons to buy life insurance. If you can be sure the mortgage will be paid if you pass unexpectedly, there is a lot less to worry about for your surviving family. For most people, term life insurance is the most affordable option, but some will prefer a whole life policy.

Term Life Insurance

Most people are looking for cheap life insurance, which is why most policies sold today are term life policies. With a term policy, you agree to a specific term of insurance, usually 10, 20, or 30 years. Your premiums are locked in for the duration of that term, so you will pay the same amount each month until the term is up.

If you die during the policy term, your beneficiary receives the total amount of your life insurance policy, no matter how much you have paid in premiums. If you die a month after your policy becomes effective, your family still receives the full amount of your benefit. If you survive until after the end of your term, however, you forfeit all money you’ve paid in premiums and must take out a new policy.

Whole Life Insurance

Whole life policies work differently. Whole life policies are permanent, meaning you will be covered for as long as you continue to pay premiums. The policies also have a cash value. For each dollar you pay in premiums, a portion goes into an interest-bearing savings account. The rest of your premium goes toward paying various fees associated with the account.

You can use the savings from your life insurance policy as collateral in a loan. You can also withdraw money from the policy to use toward expenses or as a retirement fund. Bear in mind, however, that any money you withdraw from your account goes out as a loan on which you must pay interest.

Which Policy Type is Better?

Whole life insurance policies are substantially more expensive than term policies, and their value is not equal to the amount you pay into them. A portion of your premium will be lost to processing fees and other costs paid to the insurance company so it can make a profit.

The vast majority of people are better off buying term life and investing the savings on their own. Investing your own money will guarantee better returns than your whole life investment, and there are no additional expenses to cover. Investing your own money does not devalue the amount of death benefit received from a term policy.

One situation in which a universal life policy might be a wise investment is for an individual with a substantial income and a complex estate. For the very wealthy, whole life insurance policies provide the insured a means to directly transfer money to a beneficiary, bypassing the inheritance process. For the rest of us, however, buying term life and investing the difference is a much wiser financial decision.