How to Choose Between Term and Whole Life Insurance

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Life Insurance Contract

While there are many factors you should consider when choosing a life insurance for you, one of the first places you need to start is deciding on either term or whole life insurance.

But in order to choose between these two options, you need to first truly understand the differences among the two.

The Difference Between Term and Whole Life Insurance

Term life insurance provides life coverage, and nothing else, and only for a specified period of time. What this means is that when you die (or whomever is the insured passes away), the face amount of the insurance policy is paid to the beneficiary. According to this site, insurance terms can span from 1 to 30 years.

Whole life insurance, however, goes above and beyond just coverage. Firstly, it provides protection for your entire lifetime. Also, it combines the aspect of an investment into the mix. This investment can vary from bonds to stocks. You, the insured, could borrow money against the cash value that’s getting built in this policy. Generally speaking, there are three types of whole life insurance:

1. Traditional whole life insurance – a downside is that as an investment, you likely have better options for your money
2. Universal – in years when the insurance company earns more off your dollars than expected, they pass along some of that reward. But this also can backfire, and you could end up paying more than expected if the insurance company was overly optimistic about your returns
3. Variable – similar to universal, but these are life insurance policies that invest in subaccounts.

Whole Life Insurance Sounds Fantastic. What’s the Catch?

There are many benefits to getting whole life insurance, as outlined by the WSJ. You’re basically forced into contributing to your retirement with your monthly premium. But, you’re not just paying for life insurance with whole life; you are paying for the investment portion. What this means is whole life insurance is expensive.

On the other hand, the money you’re paying each month can help you in the long run. Part of the money is for your insurance coverage; however, the other portion sits in an account that pays interest and accumulates cash value. As this amount grows, your premium can decrease. In fact, it’s not uncommon for the interest from this account to eventually pay the premiums on your behalf.

Although you are contributing to your retirement with whole life insurance, what you may face is a number of high fees and commissions that you may not see in other investment avenues.

Okay Then, What’s the Deal With Term Life?

If you’re younger than 50 and in good health, the truth is that term life insurance is pretty cheap. Here’s the issue: once you hit 50 or start facing health issues, premiums tend to rise like a thermostat in Arizona.

There are several forms of term life insurance including:

• Level term – pay a fixed premium for up to 20 years, protecting you from inflation and changes to your health
• Annual renewable term – you can renew your policy regularly, but now you’re at risk of inflating premium costs
• Decreasing term – this provides a decreasing death benefit, meaning if you die when you’re younger, you’ll leave more to your family, than if you’re older and your children are grown

Whole life insurance is designed to cover you for life. However, that’s not the case with term life insurance. If you choose to go with term life insurance you must, must, must pay your premiums. Even if you spend the last 45 years never missing a payment, then, one year, default on your payment, you are no longer covered. Period. You’re gone and your beneficiaries are out of luck.

Yikes, Now I’m Not Sure Which Insurance to Use. Help?

Consider this breakdown when determining which insurance is right for you.

You should consider term life insurance if:

• You want to protect your family from hardship if you die
• You are underinsured and what to supplement your coverage

You should consider whole life insurance if:

• You are looking for long-term life insurance
• The idea of accruing cash value that you can borrow against entices you

Also, if you’re frightened by the prospect of premiums increasing as you age, then you may want to consider whole life. Yes, the reality is that your initial premiums will likely be considerably higher than with term life insurance; however, your premiums will not increase with age.

Why does it seem more people have term life insurance

Term life insurance is popular among growing families. This is because your financial needs are often volatile during these growing years, and so long as you remain healthy, your premiums will remain low while still providing some assurance to your beneficiaries.

Term life insurance is also popular for people who want to add an extra padding to their permanent whole life insurance. This happens often when families or fiscal responsibilities are outgrowing income.

Making the choice between term and whole life insurance

One of the things to remember about your life insurance policy is that as your situation changes, your insurance needs might change as well. There are many benefits to whole life insurance, including the steady premiums (rather than escalating premiums with term). But, can you afford the initial high premiums of whole? If you’re in a situation where you need more of your income to provide for your family today, then whole life insurance is likely not for you.

If you can afford the higher premium, and want the security of life insurance for life (and not just for the life of the policy), then whole life insurance is for you.

Work with an independent insurance agent to determine what’s best for you and your family. An independent agent won’t be swayed be specific companies or plans. His mission is to match you with the best policy for you.

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