Most people don't like to think about the possibility of not being around, especially if they're young and healthy. We can plan ahead when it comes to career and education goals, but planning for the possibility of an unexpected death is difficult.
We have no problem purchasing auto insurance in case we get into an accident, health insurance in case we get sick, or homeowners insurance to protect our house. We shouldn't treat life insurance any differently.
However, which kind of insurance should a person get, Term Life Insurance or Whole Life Insurance? Understanding the difference between the two can help answer that question.
Pretty much everyone should have some form of life insurance.
However, you should definitely have insurance if others are dependant on your income and would have a difficult time getting by without it. So, if you're married and your income helps pay for the house you live in or other expenses, then life insurance will prevent your spouse from having to sell the house and move if you happen to pass away unexpectedly.
If you owe money on loans or have other debt, those expenses are passed on to your spouse, and life insurance can help pay those off.
If you have children, life insurance is a must.
Also, if you own a business, and especially if you have business partners, all partners should agree to own life insurance to cover everyone's part of the business, and to prevent a major loss in the event that one partner dies.
What if you're young and healthy and have no dependents? If you're planning on possibly getting married and having children one day, getting life insurance when you're younger means getting locked in at a lower premium. It'll save you a ton of money in the long run.
At the very least, life insurance can help pay off debt and funeral costs.
The difference between Whole and Term Life Insurance is similar to the difference between owning and renting a home.
When you own a home, you pay a mortgage, eventually own the home, and sometimes make a profit or have something to pass on to your family. That's whole life.
However, not everyone can afford a purchase a house, or some don't want to deal with the added expense of upkeep. Or they only want a particular home for a certain length of time. That's like term life insurance.
Here are the differences between the two.
Term Life Insurance is yours as long as you're paying the premium. Once you stop paying, it's gone.
Typically, premiums are paid monthly and policies can be purchased for varying lengths of time such as 5 years, 10 years, 20 years and even 30 years.
The amount of the death benefit varies too. You can purchase as little as $10,000 up to the millions.
If you pass away during the term of your policy, your family will get the entire death benefit, regardless of how much you paid for it, and after debts and estate taxes are paid off.
There are four factors that determine the cost: your age, your health, if you're a smoker, and the death benefit.
The younger and healthier you are, the lower the premium. If you are a smoker, the cost increases dramatically. This cost is set for the length of the term.
This insurance is a good choice for people who have a family or business to support financially but don't have a large financial portfolio.
For instance, if you have young children and are making $50,000 a year, and you pass away, how will your spouse make up the $50,000 a year until your kids are out of college?
Chances are you don't have enough money in savings or investments to cover all of that. Term Life Insurance can provide that buffer.
Whole life insurance lasts for as long as you live, hence your "whole life". There are a few different kinds of whole life insurance, such as variable whole life and universal life insurance.
Like Term Life Insurance, you still have a death benefit, and as long as you pay monthly, the fee doesn't change.
In addition, you are paid dividends which can either lower your premium or increase your death benefit.
After paying into the insurance for a few years, the insurance has a cash value. This money can be taken out if needed. It's kind of like taking out a second mortgage on your home.
Whole life insurance not only has a death benefit for your family, but it's also an investment.
The same four factors that determine the cost of term life insurance also affect the cost of whole life. But because there is no term limit, it costs much more. However, it can be a solid addition to your retirement portfolio.
The main benefits of Term Life Insurance are, that the death benefit is paid if you pass away during the term, you pay a little for a lot of death benefit, and you only have to pay into it for as long as you need it.
There really is only one con for Term Life Insurance. If you don't die, you paid for nothing.
The benefits of Whole Life Insurance are the death benefit is paid off any point when you pass away, it has a cash value with no tax penalty, at some point, if you don't withdraw the cash value, the dividends may pay for your premiums.
The cons are that you may be paying monthly for most of your life, and the cost may be prohibitive for many. Essentially, not everyone can afford it.
You need to anticipate that if you died tomorrow, how much money would your family need to support themselves without your income. Often, that could be as much as $1 million dollars.
But you also need to factor in how much you can afford to pay monthly.
Many employers offer group life insurance with no medical exam, which is great. The problem with that, however, is that if you were to change jobs, the insurance is gone. Also, the death benefit is usually not enough.
Whole Life Insurance is rarely offered by employers. This means that it's a good idea to look into supplementing that insurance through an insurance company.
So, hopefully, you've figured out which kind of insurance to get based on the above information.
Although, some people choose to get both, enough Term for a sufficient death benefit, and enough Whole as an investment. If you're still not sure, a financial adviser or using an online insurance comparison shopper can help you with this decision.
Contact us for a free insurance quote.