Comparing Whole Life And Term Life Insurance
Life insurance may seem like a simple concept but there are different policies to suit people's various needs
. In a way, this is a good thing as you can purchase life insurance for a specific purpose or to cover a specific aspect of your life. In order to figure out which type of life insurance would be best for you, it's a good idea to first look at and gain a level of understanding as to what whole life and term life insurance is.
Defining Whole Life Insurance
Whole life insurance is the more traditional type of life insurance. As the name suggests, it covers a person for their whole or entire life. The benefit of the life insurance policy is paid out upon your death to your beneficiaries. Generally, a whole life policy will have a cash value benefit. Most times, the whole life insurance premium and the death benefit are fixed amounts.
A disadvantage of whole life insurance policies is that the premiums are generally more expensive. In addition, there isn't much flexibility in the policy. If you want to increase or decrease the value of the premiums, this often is not an option. In addition, often the interest offered is at a relatively low level compared to what you can get elsewhere.
The advantages of a whole life policy are that it generally has a guaranteed insurance premium at a set interest rate and a guaranteed death benefit that will be paid out. There is a tax-referral benefit of the cash value and some policies also allow for loans and withdrawals to be made from the policy. It is the most secure type of life insurance policy and carries the most guarantees.
Understanding Term Life Insurance
Term life insurance is a policy that you purchase for a specific term or period of time. Premiums are paid into the policy for the duration of the term. At the end of the term, if you are still alive, the policy simply lapses. There is no cash payout or benefit unless your death occurs during the term of the policy. The premiums simply serve the purpose of keeping the policy active for the duration of the policy term. There are three broad types of term insurance policies:
Level term insurance policies have the same premiums for the duration of the investment. An annual renewable term is a yearly contract that gets renewed each year. The death benefit remains unchanged throughout the term but there is usually an increase in the premium each time the policy is renewed. Over time, this can work out to be quite expensive. A decreasing term is a policy where the death benefit decreases each year while the premium remains the same. When the death benefit becomes zero, the policy lapses.
A major disadvantage of term life insurance is that there is no cash value component of the policy. Premiums go towards the policy and do not earn interest in any way. The other disadvantage is the limited term. No one knows their actual life expectancy so it is difficult to gauge if you need a 10-year, 20-year or 30-year term. If your policy expires and you wish to renew it, you may have to prove your good health in order to be re-insured. You may then also have to pay significantly higher premiums for the second term.
On the plus side, an advantage of term life insurance is that it offers one of the most affordable types of insurance around. Because it is for a set term, it provides coverage for period in your life when you need it most. For example, if you have a 20-year mortgage or kids' educations to pay for, you could take a 20-year term life insurance policy to cover you for that period. This will ensure that should anything happen to you, your dependents are taken care of.
Deciding on the Best Life Insurance Policy for You
Ultimately, it comes down to comparing your needs to the type of insurance policies available. There are also variations on term life insurance known as variable life insurance and universal life insurance which have benefits of their own. The conservative approach would be to have a whole life insurance policy. This is the most secure type of policy. Some people feel that the interest earned on a whole life policy is not very significant and that they grow their money better in other investments. This is partly where variable and universal life insurance policies come into play. It is though, a personal choice. You need to be satisfied that you have sufficient coverage for your beneficiaries in the event of your death.
by: Frank Kasimov
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