Do you need term life insurance or a whole life insurance policy?
Knowing which option is better for your unique situation depends on your understanding of what term life and whole life insurance policies are and how they differ.
The primary difference between term life and whole life is that term life policies are life coverage only and whole life combines life coverage with an investment. How do you choose which type of policy is right for you.
Term Life Insurance
With term life policies, the insured’s beneficiary receives the face amount of the policy when the insured passes away. It’s called “term life” because you select a term between one year and 30 years. If you do not pass within the term selected, you or your beneficiary do not receive anything, and you would need to purchase a new term life policy if you wanted to continue your life insurance coverage.
Term insurance premiums are fairly inexpensive for individuals in good health and under the age of 50. The older you are, the higher the cost of insurance because you are considered a higher risk. If you need the coverage though, paying for high risk life insurance is often worth it.
Whole Life Insurance
When you purchase a whole life policy, you receive the life coverage and an investment component. Investments through whole life policies can be money-markets, bonds, or stocks. The investment builds a cash value which the insured may borrow from. Because of the investment component, whole life insurance is more expensive than term life.
There are three main types of whole life insurance, including traditional whole life, variable, and universal.
Some insurance agencies suggest whole life policies because not only do you get life insurance coverage, but you have an investment which helps you save for retirement. From a financial standpoint, however, you should know there are many better investment and savings opportunities which will provide a much higher return than a whole life insurance policy, since most have high fees and commissions.
If you haven’t purchased a life insurance policy before the age of 65, your only real option will be a whole life policy as most term insurance providers will not sell a term policy to someone who is aged 65 or older.
The biggest problem with a whole life policy as an investment vehicle is that you can never really tell how much of your premiums are going to commissions, investments and insurance. You need an expert to look at your policies to decide whether it is or will ever become a good financial investment. Some experts believe that a whole life policy will offer a reasonable return only if it is held for a minimum of 20 years. There’s one thing that is for sure, life insurance is not a waste of money. It’s an investment in your future and family.
Should You Cash in A Whole Life Policy?
If you already have a whole life policy and are thinking about switching to a term life, consider this move carefully! If you’ve only had the policy for 5 years or so, chances are you will not get anything back as the policy hasn’t had time to build much “cash value”. Surrendering a whole life policy can result in money lost. Also keep in mind that you need to re-qualify for a new insurance policy health-wise, and that your new premium will be based on your current health and age.