Following are a few tips to help you choose between term and whole life insurance coverage.
What Is the Difference Between Term and Whole Life?
The difference between term and whole life insurance is fairly simple--it’s the details that present options and make your choices tricky. The basic difference is that with a term life insurance policy, the policy only lasts for a designated period of time, while a whole life policy remains in effect until you either pass away or redeem the policy for cash--providing you continue to make the payments.
How Term Insurance Works
For many people, especially young married people or single people just entering the workforce, going with a term life policy is more attractive simply because you won’t have to lay out so much cash every month. The fact is that the premiums for a term life insurance policy are less than for whole life coverage. A term life policy can be taken out for a period of one to 30 years. If you don’t pass away during the ‘term’ of the policy, you must renew your policy or opt for whole life coverage--or go without insurance. If you die during the term, the people you designate as beneficiaries will receive the amount of money stipulated in the policy. The major downside to a term policy is that when the term runs out you must get another life insurance policy or go on with your life without coverage. The problem with renewing a term policy or opting for whole life coverage later in life is that your payments for life insurance coverage inevitably go up as you age. The process is further complicated by the fact that if you become ill at any time during the term, you may not be allowed to renew.
How Whole Life Insurance Works
A whole life insurance policy works a bit differently and is slightly more complicated. Due to the fact that the majority of people who buy life insurance will live to a ripe old age, those who choose whole life coverage will be making regular payments for an extended period of time. The nice thing about making all those payments is that a whole life policy offers a financial return for your premium payments. It’s almost like an investment account--in fact, many people treat it that way because with whole life insurance part of your payment is invested and you can eventually get part of it back. There may also be tax breaks associated with whole life insurance payments, and you can even borrow money against the returns. Those benefits account for the fact that your monthly premiums will be higher with whole life than term insurance. A tremendous advantage of whole life over term insurance is that your monthly premiums, once established, stay that way for the duration of the policy--meaning until you either pass away or redeem the policy for cash--provided you make the payments in full and on time. The major reason people tend to choose term insurance over whole life is that whole life insurance payments are significantly higher, and a lot of people simply don’t have the cash to spend.
Comparing Policies
After deciding whether or not to go with term insurance over whole life, or the other way around, you still have decisions to make. With term insurance, your choices are somewhat limited--you decide on the length of the term and the amount of coverage. With whole life coverage, you have more choices to make. The first thing you need to consider is that no matter what investment plan you decide on, there is no guarantee that it’ll make money. You could make your premium payments year after year and end up with nothing to show for it. On the other hand, you could conceivably end up making a lot of money. Before you decide on whether to go with term life or whole life insurance, it would be a good idea to talk to a tax attorney and/or your accountant and determine which course of action would be best for you. After that, you can sit down with your insurance agent, discuss your options, and make an informed decision.
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