Learning how to make smart decisions with your money includes investing in your long-term health strategy and what you need to protect yourself and your family. When considering a life insurance policy there are several recommendations and guidelines that we believe are paramount to covering your overall financial picture. We breakdown the differences between whole and term insurance, for the sole purpose of their uniqueness and the one thing that separates them–length of coverage.
Whole Life Insurance Explained
Just as the name implies, this type of insurance has no ending date of coverage, however is more pricy than term insurance. If you want to build a cash value, while also interested in leaving money behind for your spouse and children, then a permanent insurance policy is your best bet. This level of long term insurance provides permanent death benefit coverage for the life of the insured.
In addition, whole insurance contains a savings component in which cash value may accumulate on a tax-advantaged basis, also commonly known as “traditional” insurance. As the original long-term insurance policy, permanent policies are merely one type of enduring insurance. The three others are:
- Universal life
- Indexed universal life
- Variable universal life
While permanent insurance is considered to be more common and more traditional, this doesn’t equate to a permanent insurance policy, and here’s why. Even though the whole life policy is paid out to the beneficiary or multiple beneficiaries after the death of the policyholder, it’s vital that the premium payments were kept up to date and honored. Also, and regards to the savings component, it can be invested whereby the policyholder (if still alive) can have access to the cash by either borrowing against it or withdrawing any sum, depending on the need.
The Ins and Outs of Term Life Insurance
A term insurance describes a policy that offers inclusion for a specified amount of agreed upon number of years in a term. If the policyholder passes away during the time period mentioned in the policy agreement and the policy is still at full strength, the death benefit is subsequently paid out. Initially, this form of insurance is significantly less expensive than a permanent insurance policy. Unlike the latter varieties of insurance, a term insurance contract has zero cash value, which means that the prevailing value is the death benefit bonded from the policy.
The Different Kinds of Term Insurance Policies
Each of the following has its advantages and disadvantages, yet it’s up to the policyholder to specify their needs when choosing term insurance.
- Convertible term – Allows a term insurance to convert to a whole life or permanent policy
- Increasing term – As time goes on, this type of policy allows you to get the tacked on benefit into old age without having to be eligible for an added policy later on.
- Decreasing term – The complete opposite policy of the increasing term, as this particular one’s death benefit decreases over time.
- Annual renewable – With each passing year, this term insurance policy is renewed for a greater premium, mainly because the policyholder has turned another year older.
An Overview of Whole Versus Term Life
We understand how important it is to make the proper decisions regarding insurance policies and how your decision affects the livelihood of the family you leave behind after you’ve passed. Setting up one insurance policy versus the other takes some research, talking it over with your financial advisor, having the serious discussion with family members, and perhaps involving your estate planning attorney as well. Generally speaking, term life has a much lower cost than other types of permanent insurance policies.
That’s one of the major pros of opting to secure a term insurance policy prior to your death. The other advantage is that term insurance is actually easier to understand than some permanent insurance policies. The jargon is different, there’s a finite duration to the term coverage, and the overall simplicity and costs are much more manageable than whole insurance.
Some of the significant advantages of insurance for your entire life are that you can lock in your premiums. Also, if you have a major life change or unforeseen obstacle in the family, you can borrow against a permanent life policy for future financial needs. And lastly, while this type of policy is a lot more expensive than term insurance, any loans such as death benefits are free from being taxed.
Determining your lifestyle is truly step number one. If you find that taking care of your life is primary then it’s also primary to take care of your loved ones. Because permanent insurance policies are more expensive and complicated, albeit offering financial flexibility, this alone might lead you to resort to term insurance.
Consumers must make an educated choice that benefits all involved, however there’s an old adage that’s been floating around insurance circles for decades. If you buy term, you get to invest the rest. It’s really that simple.