Define the Life Insurance You Need: "Term"
When you make the decision to purchase life insurance, you will be presented with at least two types, depending on the company you talk to. They are Term Life and Whole Life.
Of the two, Term Life is purchased more often than any other. The reason? Primarily because it is cheap. It is possible to get a half million in Term Life Insurance for around $100 a month, depending on your age and your health. The fact that a lot of people have Term doesn't make it right for you, however. You need to make the correct choice the first time you purchase life insurance in order to save yourself a lot of money and frustration at retirement.
How we define Term Life
Term and Whole Life have many of the same features, available coverage limits and riders. There is one extremely important difference. Term Life is for a set time period, usually 20 years although it could be 15 or 10 years. A few companies still offer 30 year terms to young people. During that time you pay a set (level) premium for a level face value (benefit). At the end of that time period, the policy can be converted to anything else the company offers or simply allowed to lapse. It accumulates no cash value, so if you stop paying for it, it simply lapses.
If you convert the term, your premium will increase dramatically–from several hundred a year to several thousand–and will keep increasing as long as you attempt to keep it. The only conversion alternative that does not involve an increasing premium is a Decreasing Term. In this variation, your face value decreases every year, but the premium stays the same. At age 85, depending on the company, the policy terminates completely unless you converted it to Whole Life, also at a much higher premium than the original term.
How we define Whole Life
True to its name, Whole Life Insurance is an investment that will last until the day you die. It will have the same premium to age 100 unless you find a company that still offers a "paid up" version. (Those are becoming rare). If you live beyond age 100, you still have your insurance although you no longer have to pay for it. Alternatively, you can cash it in at age 100–or anytime after the first 15 years, and simply pre-pay a funeral and re-invest the rest of the cash.
Whole life is about double the price of Term Life because part of your money is being invested and used to build a cash value. Don't let that deter you from considering Whole Life, however. If you invest in whole life while you are young, the price is very reasonable. Also, keep in mind that taking a Term now, just to get a cheaper premium, will come back to haunt you when you are ready to retire and still need to keep life insurance. The increase that you will pay at age 60 or 70 for Whole Life will be hundreds of dollars higher than if you had taken the same policy at age 30. And don't tell yourself that you can take advantage of a low premium now and just pay the higher premium later. First, most people's retirement income is much less than it was during their working years, forcing them to settle for small burial policies. Second, if you add the total that you would pay in your entire life by purchasing a Whole Life in the first place, you would see that it would be dramatically less than paying for a Term for 20 years followed by a Whole Life for the last 30 or 40 years of your life.
Making the Choice
Both Term Life and Whole Life are legitimate and workable policies. You have to decide what is right for you. The following check list will give you some points on which to base your decision.
Purchase Term Life if:
- you have a family to provide for, and are financially incapable of purchasing Whole Life.
- you have a large mortgage and want an alternative to high priced mortgage insurance.
- you have a retirement plan or other investments that will pay your taxes and final expenses, making life insurance in your retirement years unnecessary.
you have a business with outstanding debt or that would need a large sum of money to replace you.
Purchase Whole Life if:
- you believe you will need life insurance coverage until the day you die.
- you have a large estate or investments on which estate or inheritance taxes will be owed.
- you want to leave a legacy to grandchildren, children, or to a charity.
- you want the option of increasing your retirement assets at a later date.
- you need coverage for a large debt, but want to retain your policy in the future when the debt has been paid.
- you want the benefit of an emergency source of cash (you can borrow against whole life).
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