When thinking about purchasing life insurance, there are usually two situations in mind: the continued care of any dependent children and covering any outstanding debts as to not burden loved ones.
Traditionally, term life insurance will cover the holder in these situations but what if the term of this policy runs out before they pass away?
If term insurance runs short of leaving this earth another, sometimes more expensive, policy may need to be purchased. Whole life insurance works the same in some aspects, except there is no “term,” meaning the policy will last the whole of the holder’s life. It is this difference that attracts some people to choosing whole life insurance.
What is Life Insurance?
Life insurance is an agreement between a policy holder and an insurance company. In the agreement, the insurance company promises to pay funds to listed beneficiaries in the event the holder should pass away. This agreement is maintained through the payment of premiums by the holder. These premium payments can be completed one of two ways: monthly installments or lump sum payment.
Premium payments are determined based on policy requirements, length of the policy, and the health of the policy holder. When the policy holder expires, the insurance company will pay designated beneficiaries a pre-determined amount of money to cover expenses such as outstanding debts, care for dependent children, and funeral expenses.
The Difference between Whole Life and Term Life Insurance
There are a few stark differences between whole life and term life insurance. When deciding on which type of policy to purchase, it is important to understand the pros and cons of each one. Many decisions on insurance are made based on a variety of factors including gross annual income, coverage needs, and personal preferences.
If more information is required to help determine which type of policy may be best suited for a particular situation, please contact us.
Term life insurance usually covers the holder for a specific period of time, traditionally one to 20 years. Premiums for this type of policy tend to be less expensive than whole life insurance and there is little risk of payment increase. The downside, however, is that if the holder’s lifespan exceeds the policy’s term there is no money paid out to the holder of the policy.
Also, if a policy expires before a holder passes away another, and sometimes more expensive, policy may need to be purchased (due to the fact the insured is much older and premiums will now be higher).
Whole life insurance differs in the amount of time the holder is covered
This type of policy lasts over an entire lifetime and is guaranteed to be paid out when the holder passes away. Because insurance companies know they will eventually have to pay benefits on a whole life policy, premiums are much higher.
These higher payments are also caused by the tax-privileged investment account related to the policy. Part of the holder’s premium is set aside into this account throughout the policy’s life and can accrue interest over time.
Although this savings account may seem attractive to some policy seekers, it is important to note that the rate of return for this savings account tends to be much less lucrative than other investment options. A benefit of holding a whole life insurance policy is that the policy can be cashed out at any time, including the money paid in during the holder’s lifetime and funds in the investment account.
Although this may provide financial assistance when needed, cashing out the policy will terminate coverage, leaving the holder to look for other insurance options.
Who Can Benefit from Whole Life Insurance?
When deciding on an insurance policy, the choice ultimately comes down to insurance needs and personal desires, among other things. Taking all of these aspects into consideration is crucial for choosing the right type of coverage.
One of the first factors to consider is length of life versus the length of a policy. Although this may be an uncomfortable subject, it is important to evaluate how many years a holder is expecting to live before making a decision.
Generally, policy seekers who are in the later years of their lives will not benefit from purchasing whole life insurance coverage; these individuals will be paying much higher premiums than necessary for the coverage they may need and will see a low rate of return on their investment account. For these policy seekers, a term life insurance policy may be best.
Finances can also play a large role in choosing whole life or term life insurance
If a policy seeker cannot afford whole life insurance premiums now, it is unlikely they will be able to afford them throughout their lifetime, especially if the policy is revaluated and payments are increased.
For individuals who are wealthier financially, whole life insurance can be a feasible option, especially if the policy is bought early in life. Purchasing this type of policy during the earlier years of a lifetime will mean more funds will be paid into the tax-privileged investment account as well as the policy overall.
The longer funds sit in the investment account, the more interest accrues, meaning the policy will have more value when it is either cashed out by the holder or paid out to beneficiaries.
Many aspects of life need to be considered when making a decision about life insurance coverage. Weeding through the details of each policy can become both confusing and overwhelming. When looking into this kind of investment, it is important to evaluate some key factors.
Life expectancy, financial ability to pay premiums, and coverage desired should all be reviewed when deciding on which type of life insurance policy to invest in. In the event that choosing a policy becomes difficult, our company is available to answer any questions and help policy seekers make the best decision for their unique situation.