Term vs Whole Life vs
Discover the Best Life Insurance Policy for You?
Many financial analysts, experts and gurus spend the bulk of their time in books and on the airwaves extolling the virtues of Term Life Insurance over Whole Life. Many of them unequivocally state that Term Life Insurance is the best insurance option for families.
While in many instances they may be correct, financial planning advice is not meant to be given generically. For some families the less cheap, Whole Life policy makes for a more practical option. When you take the time to learn about the difference between Term and Whole Life Insurance, you ready yourself to make an educated decision about your financial planning...
What isTerm Life Insurance?
Term Life Insurance is a simple insurance policy that is in-force for a predetermined number of years (if the premiums are paid on time) and pays out a death benefit should death occur during the term of the policy. Term Life Insurance is not meant to be viewed as an investment. It is a simply structured policy that offers no return on premiums—unless the insured passes away. After the term of the policy ends, the insured may receive a refund of premiums if he or she purchased a return of premium rider. If not, nothing is returned to the insured and the policy is considered not-in-force.
Once the policy term is up policyholders have the option of going through underwriting again, at their present age, and “renewing” the policy for another term. Their quotes will show a higher price based on their age as well as possible changes in weight and health. The major benefit of buying a Term Life Insurance policy is that it is cheaper than Whole Life. You are paying simply for the cost of insurance in this stripped-down, no cash value policy. For those without a lot of extra money to spend on insurance, a Term policy can be a life saver.
In addition to being low cost, Term Life Insurance does have flexible planning options. In most instances, Term Life has a level premium that is paid for a certain number of years and the policy provides a level death benefit. You can, however, choose a Term policy with an increasing or decreasing death benefit and level premium. You can also choose a policy that renews annually (Annual Renewable Term). Annual Renewable Term policies will have increasing premiums as you age.
What is Whole Life Insurance?
So where does Whole Life fit in? While not an investment in the traditional sense, Whole Life Insurance does offer some value beyond that of a death benefit. Unlike Term Insurance, Whole Life Insurance accrues cash values that grow at a guaranteed rate of return. Keep in mind, the cost of insurance is taken out of your premiums and the remainder is left to accrue as cash values—so your cash value is not going to be equal to your premiums (even with that guaranteed return) until your policy endows, which is usually around age 100. This illustrates another significant difference between Term and Whole Life Insurance. Whole Life is active your entire life, as long as you pay your premiums on time. That means you do not have to reapply or pay new rates during the life of your policy.
Of course, Whole Life (sometimes called Permanent Life) also has some additional options for those who are unsatisfied with the traditional model. Policies like Variable and Equity Indexed Life allow the cash values to exceed the fixed growth promised within a traditional Whole Life policy and instead grow (or decline) based on the performance of underlying investments which may consist of stocks, mutual funds or stock index options.
If you’d like to merge the inexpensive design of a Term policy with the possibility of fixed cash value growth, you could also opt for a Universal Life policy. In a Universal Life policy, any premiums that exceed the cost of insurance are invested in your cash values. As you age, your cost of insurance increases, but the additional dollars can be pulled out of your cash values or balanced by a decrease in the death benefit.
As you can see, there really is not easy answer to the Term versus Whole Life Insurance debate. In order to make the best decision for your family, you must explore all of the options and decide which policy works best for you, rather than rejecting one type based on something you may have heard on the radio or television.
| | | |
Copyright © 1998 -
All Rights Reserved