Life insurance is a must if you want to provide for your loved ones and protect them from financial problems after you are gone. There are two basic types of life insurance: whole life insurance and term life insurance. Whole life insurance protects you for your whole life. Term life insurance provides coverage for a specific period of time, such as five, ten, or twenty years. Many people wonder which one is the best insurance and whether if they should get whole life or term life insurance.
The Basics of a Whole Life Policy
Whole life insurance policies, also known as cash value or permanent insurance policies, combine insurance coverage with an investment vehicle. When you buy a whole life insurance policy, you are arranging insurance coverage for your entire life. Your coverage will never be cancelled as long as you pay your premiums.
In addition to providing a death benefit for your family, a whole life insurance policy also allows you to build cash value that can be borrowed against or paid out in dividends. The cash value can accumulate in several ways, but typically grows through investments in bonds and money market instruments or stocks.
It is important to note that whole life insurance policies are not always the best investment vehicle. Although the money invested through a whole life policy can grow tax deferred, the returns are rarely as good as the returns on ordinary security instruments like mutual funds. This is due in part to the fees and expenses that must be paid to the insurer.
You should also be aware that the additional money you accumulate through a whole life insurance policy will not be given to your family in addition to the death benefit you have arranged for them to receive. They will be paid the death benefit (the face value of the policy) and nothing more.
Whole Life vs. Term Life- Which One to Get?
Each type of life insurance has its own sets of pros and cons. To start, whole life insurance coverage is often more expensive than term life. When you buy a whole life policy, you are paying for the investment portion of the policy in addition to life insurance coverage. With term insurance, you are paying for coverage alone.
The advantage of whole life insurance is that your premiums will never change. You will pay the same amount regardless of age or health status. With term insurance, there is a good chance that your premiums will increase when you are forced to renew your policy.
Whole life policies are more popular and account for nearly 70 percent of the life insurance policies that are sold. However, term insurance is often considered the better value for many people. Before choosing one type of life insurance over the other, you should take time to carefully research each option and evaluate your individual needs.
Deciding How Much Life Insurance to Buy
Deciding how much life insurance to buy is a very personal decision. There is no set amount that is considered either right or wrong. However, there are several things you will need to account for to create an accurate estimate. These include burial costs, current debts, income replacement needs, and education costs for your children. There are many different free calculators online that can help you add up these considerations. You may also be able to get further assistance from a qualified insurance agent, financial planner, or estate planner.