What Type of Life Insurance do you Need?
Many people know that they should purchase life insurance to protect their loved ones. Without life insurance coverage, your family could struggle to pay bills, manage education expenses, or even purchase everyday necessities. If you do not know how to effectively compare life insurance options, though, you could end up buying a policy that is not appropriate for your needs. When evaluating your options, it is important to understand the similarities and difference between term life and whole life.
Similarities Between Term Life and Whole Life
The primary similarity between term life and whole life lies in the primary function of both policies, which is the death benefit. Both policies feature a specified death benefit that is payable to your designated beneficiary if you pass away while it is active. Your beneficiary can use the death benefit for any purpose, including paying off debt, meeting living expenses, or even taking a dream vacation.
You select the amount of the death benefit when you purchase your plan. In some cases, you can change the amount of the death benefit as your family's financial needs change. Of course, if you increase it under either of them, your premiums will also increase.
The premiums for both types of policies are partially dependent on your age at the time of policy inception. Generally, starting a policy at a younger age will result in lower premiums. For example, if you purchase a one at age 25, you will pay substantially less for coverage each year than if you purchase one at age 50.
Differences Between Term and Whole Life
The primary difference between the two lies in the length of the coverage term. Term life policies are designed to provide coverage for a limited number of years. Most term policies are available for 10-, 20-, and 30-year durations. These policies are appropriate for situations in which the beneficiary's financial needs are limited in duration. For example, if your children will be out of college and your mortgage will be paid off in 20 years, it might make sense to purchase a 20-year term life policy.
Conversely, whole life plans remain in force until you die or turn 120, whichever comes first. Because the duration of these policies is much longer than the duration of most term life policies, the insurance carrier bears a greater risk of having to pay a death benefit.
Another significant difference is the cost of coverage. Because the insurer is more likely to pay a death benefit under a whole life arrangement, premiums for these are substantially more expensive than for a comparable term policy.
Also, term life insurance does not have a guaranteed payout. If it expires before you die, the insurance company is not obligated to issue payment. In most cases, you will not even receive the premiums you have paid into it.
Conversely, a whole life plan will pay regardless of whether you die before it matures, provides that you continue paying the premiums necessary to keep the policy in force. If you die before the policy ends, the insurer will pay the specified death benefit to your designated beneficiary. If not, you will receive the cash value.
Unlike a term policy, many whole life plans provide the opportunity to earn interest on your premium payments. Part of your premiums go toward building cash value within the policy, which the insurer invests to increase profitability. If the market the investments are tied to increases in value, the cash value in your policy earns interest. Keep in mind, though, that some types of whole life policies can also lose value if the market value declines.
Finally, some policies permit tax-free loans against the cash value. As yours accumulates cash value, it creates a financial cushion you can borrow against to take care of unexpected expenses or supplement your retirement income. Because term policies do not accumulate cash value, no option exists for borrowing against them.
Choosing between these 2 types of insurance is not a simple decision. When you compare life insurance options, consider the similarities and differences between them carefully. If you are not sure which is right for you, get in touch with an agent or broker who can help you determine which one will best suit your needs.
Understanding Life Insurance
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(price as of Feb 19, 2014)