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Term vs Whole Life Insurance – The Debate Continues
If you are considering your life insurance options, you have undoubtedly encountered the "term insurance" versus "whole life insurance" debate. With so much information and so many opinions, it is easy to get caught up in a whirl of confusion. The key is to research your options, because there is no 'one size fits all' approach.
First, you need to understand the basics of each type of insurance. Once you know that, consider how they will apply to you. What are your financial goals? Do you have other investment tools at work for you? Would a combination of strategies be your best option? Once we address a few of these questions, it will be much easier to determine which route will suit you and your family – term or whole life or even a combination of the two.
Defining Term Life
Term life insurance offers coverage to the policyholder for a specified length of time. Generally, this type of policy is bought with an objective in mind. For example, term life insurance is a popular option for individuals with limited income. It is also sought after by those with high, but short term insurance needs; entrepreneurs who wish to cover a business loan, or for personal family protection. While term life policies offer no cash value accumulation; they do provide for beneficiaries upon your death. The face value is usually collected tax free, assuming that all premiums are paid current.
The Advantages of Term Life
Term life insurance typically boasts low premiums. Given the lower premiums, many industry experts believe that term insurance provides the best insurance coverage per premium dollar. In addition, this type of policy does provide you with the coverage you need to meet all your short-term needs. A good example of such a need would be your mortgage.
Finally, term life insurance policies can also serve as a complement to your whole life insurance policy, should you opt to have both in place. Convertible term policies are available. These policies will enable you to convert your current term coverage to permanent life insurance at a later date, and generally a medical exam is not required.
The Disadvantage of Term Life
To truly determine what type of coverage is right for you, you must also consider the disadvantages or cons of term life insurance. The first thing to keep in mind is that coverage only lasts a pre-determined length of time. In addition, premiums will continue to climb as you age, or your death benefit will decrease. As stated above, there is no cash value accumulation.
You will also need to look to the future, by realizing that riders that are available with whole life insurance policies are not usually obtainable, and you may be unable to purchase additional coverage at a later date. Finally, term life is not typically available to seniors and these policies are not appropriate for paying estate taxes.
Defining Whole Life Insurance
Whole life insurance offers policyholders permanent and lifelong insurance coverage. Of course, this is assuming that you continue to pay your premium payments! The policy benefit typically remains the same over the course of time, and is payable to the beneficiary(s), upon the insured's death.
Unlike term life insurance, whole life is designed to last over an extended period of time. Those wishing to cover permanent needs favor these types of policies. Permanent needs may include covering final expenses or contributing to a survivor's nest egg. Whole life policies also present you with an opportunity to build cash value. This may become important later in life, if you are faced with unexpected costs. You can take a loan on your policy to cover major purchases or help finance that 'rainy day'.
The Advantage of Whole Life Insurance
There are a number of advantages to consider. First, whole life insurance policies offer guaranteed protection for life, as long as you continue to meet your premiums. Premiums do not increase in direct correlation with age, and typically, your death benefit is tax-free.
In addition, whole life insurance offers low risk cash value accounts, and the cash may accumulate tax-deferred. In certain cases, you may be able to convert your cash value to an annuity or even opt to make tax-free loans of your cash value. Finally, many depend on a whole life insurance policy to provide their loved ones with the funds to pay for medical bills, final expenses and any remaining debt.
The Disadvantages of Whole Life Insurance
One of the major disadvantages associated with whole life insurance is the cost of premiums. Many find the high premiums to be a hindrance, and are unable to purchase the appropriate amount of protection. Following along that same thought, in order for a whole life insurance policy to be beneficial, you will have to maintain the policy for a considerable amount of time. You are unable to vary your monthly premium payments and the payment period time is lengthy.
Another disadvantage is that at the 'end of the day' the cash value of your policy may be less than your face value. This is one major reason that proponents of term life insurance encourage policyholders to buy a term policy and invest the difference. But we will touch more on that later.
There are two final points to consider when shopping your options. First, should you opt to take out a loan, the amount is deducted from the cash value or death benefit of the policy. In addition, you generally are unable to increase the amount of coverage at a later date.
What Type of Policy is Right for Me?
There are a few basic questions to ask yourself. First are your insurance needs permanent or temporary? Also, you must face the practical issue of premiums. Can you afford the high premiums associated with whole life insurance? Are you disciplined enough to, 'buy term and invest the difference'? If you were faithful in putting your pennies in the piggy bank as a child, this may be a smart option. However, if you know that you will spend every extra dollar buying fabulous shoes or that amazing set of golf clubs – you will want to consider the 'forced' savings that whole life insurance provides.
There is always the option of a convertible term policy. Many find that it is an appropriate way to begin. Despite your choice, at the end of the day, you want to ensure that the type of coverage you opt for will help you build a strong and solid financial foundation for you and your family! Our last tip? Do not depend on either term or whole life insurance as your primary source of investment. Talk with a financial advisor regarding other options, such as 401Ks, IRAs, Stock Options, etc. You can never over prepare for the future.
About the Author: Establishing his insurance career in 1985, Gary Stuart began from the ground up, building and cultivating an agency which specialized in several lines, including long term care, group health, disability, whole life insurance and more! In 2001, Gary translated his 15 years of experience in the industry to the development of his website which provides his customers with an opportunity to explore their insurance options. For more information, you can vist his site at: www.acculifeinsurance.com
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