One day after the loss of both of my parents and my grandmother along with multiple life-threatening freak accidents, I decided something had to give and we needed a good life insurance policy that would ensure that no matter what happened to either of us the other would have time to cope with the loss and not worry about money. Because “you don’t want an emotional tragedy to become a financial one.” One big choice we had to make was between whole life insurance vs term life.
Term Vs Whole Life Insurance
You have probably heard of both whole life insurance and term life insurance if you are looking to purchase life insurance. Before choosing one or the other based on what you’ve heard or what your insurance agent tells you, you should familiarize yourself with the meaning of “term” and “whole,” as well as the pros and cons of each one (and how these pros and cons will affect you).
Cost of term life insurance compared to whole life insurance
For our family this was the biggest deciding factor. We knew we needed some form of life insurance seeing we both tend to attract freak accidents, but we don’t have a huge expendable budget to put into life insurance every month.
Let’s start with a term life policy. The term of the policy can be 30 years, and the policyholder is covered for that period of time. Policyholders can be covered by level-term premiums and annually renewable premiums that are less expensive than whole life insurance. With level-term premiums, the premiums remain the same throughout the policy’s life, while with annual renewable premiums, the premiums increase as the policyholder ages.
Our second option is whole life insurance, which includes an investment component in addition to term life insurance. Whole life insurance involves two components: the mortality charge, which pays for the insurance coverage, and the investment component, which earns interest and acts as a savings account. Mortality charges increase as policyholders age, but investment components decrease. The cash surrender value (the amount you will get back if you cash in your policy) is not always what it appears to be. The relationship between the stock market and reality is complex because of its volatility.
When it comes to finding a good, affordable life insurance policy on a budget, term life insurance is probably your best option. In addition to being affordable, it includes only those benefits you really need. The proceeds from whole life insurance, on the other hand, can be applied to estate taxes as a means of planning your estate rather than leaving your family to deal with creditors.
The other issue is that whole life insurance is very expensive, and if you don’t have enough money to pay for all the coverage you need, you might not be able to afford it.
Things to consider when choosing whole life insurance vs term life
Your Needs. For example, if you only need coverage until your children graduate from college, you might be better off with a term life policy. In our case we want to make sure that the other has time to cope with the loss without having to worry about work.
If you want to provide lifetime security to your spouse or plan for your estate taxes, cash value insurance makes more sense. Term policies cannot be renewed past the age of 70 or 80 and can become more expensive to renew as you approach that age. Our term life insurance policy goes until I am 95 which is WAY past my life expectancy.
The Cost. If term life insurance is more affordable for you and you want life long coverage, consider a term life policy that can be converted to a whole life policy. You can then convert the policy whenever it is necessary for your cash flow or needs. It is also possible to purchase term life and whole life insurance at the same time and gradually transition into whole life insurance.
Your Savings and Investment Goals. An entire life insurance policy can be an excellent investment vehicle for the long term, especially if the cash value grows tax-deferred. The accumulated cash value is available upon surrendering the policy if you no longer require the insurance but would like a cash infusion. You should discuss the tax consequences with your tax advisor before taking any action.
As an alternative, you could purchase term life insurance and invest the money you save on premiums yourself. Comparing returns can be helpful, and remember to factor in taxes if you will be investing in taxable securities.
Whole life insurance vs term life insurance which is better?
To help make the choice easier let’s take a look at this choice in a simple way. Think about it like buying a car.
An insurance policy for term can be compared to a car lease. Leased cars provide benefits while you use them, but when you stop paying, you no longer have them. If you pay your premiums, you are covered by a term life insurance policy. If you stop paying, however, you no longer have coverage.
Cash-value policies, or whole life insurance policies, build up over time. As with buying a car, you have an asset which you will be able to keep. Unlike a car, this asset is likely to increase in value. Different types of permanent insurance include whole life, universal life, and variable universal life. Most permanent insurance policies are meant to be kept until you die or to be used as a saving vehicle.
What can affect the price and value of life whole insurance?
The way the policy grows in value gives you the different names of insurance such as, Whole Life, Universal Life, and Variable Universal Life. That leads to the understanding of the different types of permanent policies.
Whole Life – An insurance policy where the premium payment and the death benefit remain the same over the policy’s life. When the policy is in effect, you usually have to make the premium payments.
Most of the risk is taken by the insurance company. No matter what happens to the account’s cash value, they are paying you a death benefit. In exchange for making your payments, the insurance company has to pay your death benefit. There is a possibility that this is the most expensive.
Universal Life – Traditionally, this is a type of insurance policy in which premium payments and the death benefit can both be changed by the owner. If the death benefit needs to be raised, you will usually need to provide some proof of insurability (medical information) or other information. Your policy grows based on an interest rate that changes periodically.
Insurance companies take some risks. Considering that the policy pays an interest rate, it grows. You may only be able to earn low rates of interest sometimes. If you want to keep your insurance, you may have to make larger payments.
Variable Universal Life – Is an insurance policy whose premiums can be changed by the owner and whose death benefit can also be changed. It is usually necessary to show evidence of insurability (medical information) if the death benefit is going to be raised. The growth of your policy is determined by the investment choice you make. As you may invest in market instruments that are similar to but not exactly like mutual funds. It is possible for your policy to lose value, leading to higher premium payments.
Insurance companies have taken the least amount of risk. The rate of return on the Variable policy is variable, which means you don’t know how fast your policy will grow or shrink. It is most likely used by people who are younger and have the ability to ride out the volatility of their portfolio. Typically, this type of policy has the lowest premiums because you take on the greatest amount of risk.
Protection from casualties in life is provided by life insurance as a risk mitigation measure. Life insurance began with providing coverage for a set period of time, and in case the insured died during that period, the beneficiary received a death benefit. The downside was that the period was limited, leading to the invention of new products that provided death protection for the duration of an individual’s life.
Why Term Life Insurance May Be The Best Choice
Our agent was clear and direct when helping us make this important choice. Our chancing of outliving our insurance policies is slim to none. We have little to no doubt and our income and assets are low enough that, like the average person inheritance tax is not a factor. We got into our plants young enough to keep the costs down. This is important because:
Due to the greater chances of death with time, the premium increases with term insurance. A term policy can be renewed after the period with a higher premium; it can also be a decreasing policy, in which coverage decreases by a certain amount each year; or it can be a convertible policy, in which the policy can be converted to a cash value policy. Whole life policies have a constant premium throughout the lifetime of the policyholder. Generally, whole life insurance premiums are higher than term insurance premiums.
The benefit of term insurance is that since the premium is lower, the extra money can be prudently invested elsewhere to maximize the individual’s return. Money that comes from whole life is available for borrowing, for example, to spend on education for children. Innovating policies provide many features such as guaranteed returns and dividend payments.