You know that you need life insurance. You also know there are different types of life insurance. So how do you find out what kind of life insurance will work best for you?
The right choice for you is all about what you want the policy to do for you and your loved one.
Whole Life Insurance: The Basics
Whole life insurance (A type of permanent life insurance) is an insurance policy that lasts until the death of the insured. Premiums pay for the cost of insurance and other fees, with the excess put into a general account. These extra premiums often grow at a low but guaranteed interest rate, meaning that over time, a small amount of cash value is available.
Peace of Mind
Whole life offers the peace of mind knowing that your insurance will pay out at the time of your death as long as the premiums are kept up. It doesn't expire (although some policy's mature at age 100). And when the cash value is high enough, you may stop paying premiums.
For some, that peace of mind is worth the higher premium costs.
Whole life insurance usually features premium payments that do not change as you get older. While you will pay more for whole life insurance vs term, this consistency can help you budget for the long run.
The interest rate on whole life's cash value may not be high, but it's guaranteed. That makes whole life one of the safest places to put your premium dollars.
Access to Cash
The cash value of a whole life insurance policy is yours. You can borrow at low cost - sort of like borrowing money from yourself. If you don't pay it back, the amount would be deducted from the payout value. Borrowing too much without paying it back can hurt your policy, but it can be a great safety net should unexpected expenses pop up.
Leaving a Legacy
If you're looking to do more than just cover the needs of your family after your passing, a whole life insurance policy can be the way to leave an inheritance. Whether you leave the legacy to your family, set up scholarships, help a non-profit, or give to other philanthropic pursuits, whole life can the right option.
Term Life Insurance
Term life insurance, unlike whole life, has a set expiration date. You can buy term life insurance for periods of 1 year up to 5, 10, 15, 20, 25 or 30 years. Some term policies have the option of a term-to-65, ending on your 65th birthday. Term life insurance can be a finance-savvy move for those who are simply looking to have coverage for their loved ones for a set period of time.
Here as some advantages of term life insurance.
Insurance is a prediction game. The insurance company has to consider how likely you are to need the benefit during the duration of the policy. This cost is referred to as the cost of insurance. For whole life insurance, that's a very high likelihood. Therefore it costs more.
For term life insurance, the likelihood that you will die during the term may be lower depending on your age and health factors. This means the cost of insurance is lower. The downside? The cost increases when you renew your policy, at after a certain age, term insurance is no longer offered.
Covers the Basics
Not everyone is looking to establish a large inheritance or philanthropic donation through their life insurance. At its most basic, life insurance helps a person provide for those they leave behind who depend on them. A person with a spouse or children who rely on their income needs to have life insurance to help cover the costs of burial, living expenses, current obligations and past debt.
As you and your family get older, this financial dependency usually wanes. That means by the time you retire, your needs have changed. Consequently, a large life insurance policy becomes an unnecessary expense.
Term life works well for those who have other investments and are not looking to use their insurance money or even grow it. A popular strategy is to buy a term policy and invest in mutual funds with the difference in premiums that you would have paid for a permanent policy.
Be sure to talk with a financial planner before making investment decisions.
Your Life, Your Decision
When it comes to life insurance, it's not a matter of one type is better than another. It's all about assessing your financial needs and what you want life insurance to do for you. By knowing what you're looking for and doing your research, you can get the life insurance that's right for you.