There are two major kinds of life insurance. Term life insurance protects the members of your family for a specific period of time. On the other hand, whole life insurance policies do not expire; they are aimed to protect you for your whole life. Some kinds of these policies gather cash value.
About Term Life Insurance
What is the length of term life insurance?
It’s named term because the insurance is valid for as long as the term you choose. Term policies defray death profits—if you pass away during the period guaranteed by the policy, the rest will go to your heirs. Term life insurance can be for a short term as one year and up to 30 years. Most companies provide policies in augments of 5 or 10 years, so you can get coverage for 5, 10, 20, or 30 years, for example. Once the term expires, you’re not covered anymore. If you cease paying premiums, you won’t be covered, either.
Sometimes, it is probable to turn a term life policy into a whole life policy, but it is dependent on your insurance provider and their terms and conditions. This is one of the things to request from an advisor when considering choices for life insurance.
What is the price of term life insurance?
Term life insurance is usually the most cost-effective because, after the end of the term, the coverage expires. You have to pay a premium for the whole term—usually, payments are made monthly. The amount of your premium is different based on your health and other issues but will be cheaper than premiums for most whole life insurance policies, which last a lifetime and build cash value.
Because of these two features—simplicity and limited duration—term policies also are to be the cheapest, often by a vast margin. If all you want from a life insurance policy is the ability to shield your family when you die, then term insurance is likely the best suit if you can buy it. Since term policies are usually more affordable and can be valid until your child enters adulthood, they could be a choice for single parents who may seek an additional safety net.
The average 30-year-old man can receive a 20-year term policy with a $500,000 death benefit for $27.42 a month. Because of her usually longer lifetime, the average 30-year-old woman can buy the same policy for just $21.74.2
A variety of issues will alter those prices, of course. For instance, a larger death benefit or longer term coverage will augment the premiums. Also, most policies need a medical exam, so any health ramifications could increase your rates above the norm as well.
Because term insurance finally ends, you can find yourself having spent all that money for no aim other than peace of mind. Also, you can’t utilize your investment in term insurance to raise wealth or save on taxes.
About Whole Life Insurance
What is whole life insurance?
As the name alludes, whole life insurance protects you for your whole life, provided that you keep paying your premiums. Whole life insurance usually goes with guaranteed level premiums (the amount will never vary as long as premiums are paid).
Whole life insurance policies defray death benefits (proceeds after death) and they may also raise cash value.
What is the meaning of “cash value”?
The cash value of a whole life policy will increase each year until it will be equal to the face value of the policy. You may get access to this cash through loan and withdrawal choices.
What is the price of whole life insurance?
The amount you defray will be dependent on how much coverage you seek. Also included in the price are your age as well as your gender and health, among other considerations.
Whole life policies are chiefly “level premium,” which means that you defray the same amount per month for the term of the policy. Those premiums are divided in two ways. One part of your payment will be devoted to the insurance component, while the other part contributes build your cash value, which increases over time.
Many companies provide a certain interest rate (often between 1% to 2% per year), notwithstanding some companies sell partnership policies, which defray unsecured dividends that can augment your complete gain.
Early on, the amount of the whole life premium is greater than the price of the insurance itself. As you grow older, though, that reverses, and the price becomes less than that of a usual term policy for someone of your age. This is called “front-loading” your policy.
At a later date, you can take a loan or make a withdrawal from your cash value amount, which increases on a tax-deferred basis, to defray the costs such as your kid’s college tuition fee or home improvement. In that sense, it’s a much more pliable fiscal tool than a term policy. Loans from your policy are tax-free, though you’ll have to defray income tax on the investment earnings from any withdrawals.
Unfortunately, the death benefit and cash value aren’t disparate features. If you get a loan from your policy, your death benefit will decrease by a corresponding amount if you don’t pay it back. If you get a $50,000 loan, for instance, your heirs will receive $50,000 less, plus any interest due, if the loan is still prominent.
The major disadvantage of whole life insurance is that it’s costlier than a term policy—by quite a bit. Permanent policies cost on average between five and 15 times more than term coverage with equal death benefits. For a lot of consumers, the relatively high price makes it difficult to keep up with payments.
Another potential disadvantage of whole life insurance is its sophistication. With a term policy, for example, you can easily cease making payments if you no longer require the insurance or can no longer buy it.
Still, depending on your career, whole life policyholders may encounter a surrender cost of up to 10% of the cash value if they seek to walk away from their policy. Usually, this charge decreases as the years go by until it eventually vanishes.
So, should I purchase term or whole life insurance?
Generally, you should take into account a term life insurance policy to:
- Get precious coverage at a low price
- Contribute to cover specific fiscal responsibilities like a mortgage or college costs
- Protect your family from adventitious events
Consider a whole life insurance policy if you desire:
- Protection for life
- Payments that remain the same each year
- Cash value you can utilize while you are alive
Is Term Life Better than Whole Life?
This is a repetitive question in the life insurance industry. The answer is that it is dependent on your needs and desires. If you only require life insurance for a proportionately short period of time (such as only when you have minor children to bring up), the term may be better as the premiums are cheaper. If you require permanent coverage that lasts your whole life, whole life is possibly preferred. Whole life also presents several living benefits emanating from its cash value accumulation, which decreases its actual price over time.
What is the length of Term Life Policies?
Usually term life policies are in terms of 10-, 15-, 20-, 25-, or 30-years. A small number of insurers will provide 35- and 40-year policies as well.