Life insurance is important to anyone who has a family or debts. When you die, you should be sure that your loved ones are taken care of and your debts are paid off. This really boils down to a choice between term life insurance and whole life insurance. Let’s take a closer look at each type so you can make an informed decision.
Term insurance is the least expensive but provides only a limited length of coverage. The danger with term insurance is that you may outlive the policy and your heirs will get nothing. Whole life insurance will provide protection for your entire life (even if you live to beyond 100), and in some cases will even build cash values that you can access while you are still alive.
Whole Life Insurance
Since whole life insurance lasts a lifetime and the insurance company is guaranteed to be making a payout, it is typically more expensive. Some of your premiums will go into a savings program. The longer you maintain the policy the larger these cash values grow (due to interest and dividends that get deposited into your policy). While your premiums will be higher than they would be on a term policy, they will not increase over the length of the policy, unlike a term contract.
The extra premiums that are paid during the first few years of the policy get invested and increase the cash values. Later in life your premiums will just cover the cost of the insurance. If you access the cash values in your policy, for the most part you will have to pay taxes on the gains (there are some ways around this in certain circumstances, so be sure to fully investigate), but if you die, the proceeds will be transferred to your beneficiary tax-free.
Term Life Insurance
Term life insurance contracts will provide protection for a set length of time, usually up to age 80. They will also hold their premium payments for a set length of time, usually 10 to 20 years. This means that the premiums will increase every 10 or 20 years. Since you will then be one or two decades older, these premiums can increase dramatically. Because of this, most people only buy term insurance to provide coverage for those 10 or 20 years. The most common use is to insure a mortgage or some other loan. The idea being that the loan will be paid back over the length of the term, negating the need for insurance.
The key question is how much insurance do you need and which type should you buy? A common practice involves buying term insurance and investing the difference (that you would have spent on whole life insurance). This is a great idea, but it can be difficult to put into practice, especially if you don’t have a savings plan in place. Be sure to evaluate your insurance needs carefully so you can make the best decision possible and be sure to consult with a licensed, experienced agent before making any purchase.