Term Vs Whole Life Insurance

No one is really sure when it started but it seems as though the debate about which type of life insurance is best—whole or term—has raged since the creation of insurance itself. Each has their passionate adherents and they make valid points in their defense. So who is right, which is the best type of life insurance? The answer is, it depends. It depends on where you are in your life, it depends on your available resources, it depends on a lot of things.

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Term and Whole Life Explained

If you simply need to have something in place to protect your family in the event of your untimely demise and have it done at the lowest cost possible, then the easy choice is term. But most people shopping for life insurance do not choose their product based on price alone. Finances, like life, tend to be complicated. And the insurance industry has responded to this complexity by creating increasingly sophisticated products in order to meet the needs of their customers.

When choosing life insurance the following factors weigh most heavily on the decision to go with term vs whole life:

  • Marital status
  • Home ownership
  • Age
  • Financial health
  • Cost of premiums – Will they fluctuate over the course of the policy?
  • Physical health – How often, if at all, will the insured have to get a medical exam?

These are not the only considerations, of course, just some of the most common ones. As you discuss your options with your financial advisor you will undoubtedly have more. Keeping in mind that there are variations in types of policies just as there are variations in circumstances, what follows is a general overview of both term and whole life insurance as well as the relative merits of each.

Term Life In-depth

Term life insurance is exactly what it says it is. It provides life insurance for a set term and then it expires. For this reason it is significantly cheaper than whole life especially for people under the age of 40. There are also different time periods that term life offers, with the most common being 5, 10, 20 and 30. Typically 30 years is the longest time period many companies will offer but there are some that offer 35 and 40 year term life insurance.

A good term life policy will also give the insured the option of renewing the policy without a lapse in coverage or taking a new physical. This is an especially attractive feature to older people who may have difficulty getting a low premium based on their current health.An attractive feature for younger people are term policies that can be converted to a whole policy without a lapse in coverage or needing a medical exam.

The downside of term life insurance is that, unlike whole life, there is no cash value in the policy. You could potentially pay for a 30 year term policy for the full 30 years and never receive a dollar back on that investment. In that case, the term insurance will have merely performed the function of protecting designees in the event of the insured’s untimely death.Also, most term policies require you to renew within a specific period of time and if you do not there will be no death benefit should the circumstance arise.

Just as there are different time periods available in term so too are there variables with premiums. There is: Level Term where the premium stays the same; Increasing Term which is when the premium starts out low but then rises over the course of the policy; Decreasing Term (the opposite of Increasing Term) which is when the premium starts out high but then falls over the course of the policy.

Whole Life In-depth

Just as term life insurance is self-evident, so too is whole life insurance. It is life insurance that provides a death benefit for the whole of a person’s life.The best part of whole life insurance is that it provides the dual benefit of having a payout at death as well as having cash value. The cash value occurs when the insurance company takes the premiums that have been paid into the policy and puts them into low-risk investment tools. The cash value can be borrowed against, but withdrawing the cash value may have tax benefits. Another great feature of whole life is that the death benefit stays the same whether you have the policy for two years or for 20. Furthermore, even after all of the premiums have been paid, the policy remains in place until death.

The downside of whole life is, because it has cash value and can double as an investment tool, it has premiums that are higher than term. And while you are paying those premiums you will be unable to tell how much of your money is going toward insurance and how much is going toward to the investment portion of the policy that creates cash value.

Speaking of investing, you have no say in how the insurance company invests your premiums. Needless to say, when the stock market is feeling tumultuous, this can affect your earnings greatly. Most, if not all, insurance companies guarantee a minimum rate of return on your whole life policy. When comparison shopping you’ll be able to compare the cash value of say, one company’s whole life policy of $250,000 compared to another company’s policy of the same amount.

Lastly, although the cash value of whole life is great, you typically will not see any earnings in your whole life account for at least ten years, if not longer.There are variables to whole life, of course. For example, you can take a locked-in rate, guaranteeing you a specific rate of return regardless of market volatility. The problem with that is, of course, you do not reap the benefits when the market is thriving.

Conclusion

The amount of permutations term vs whole life are seemingly endless but, suffice to say, there is a product available that can meet most any need, and laying out and examining your needs is the most critical step towards deciding on the type of policy to choose. After that, the choice become obvious.

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