Life insurance is one of the best investments you can make to financially protect your family should something happen to you, but with many different plans available, choosing the one that’s right for you can be a little tricky. In this article we will spend some time discussing the two main types of life insurance, term and whole, highlighting the advantages and disadvantages of each to help you make the most informed decision.
Term Life Insurance is a type of insurance policy which covers the insured for a specific and relatively short period of time. The premiums for this insurance are significantly less than other insurance policies, with all of the money paid in by the insured going to pay for the insurance itself (and not savings, for example).
While the policies are much more affordable than other types of insurance, there is a downside to these types of policies. These include:
- At the end of the term (5 years, 10 years) the policy will have to be renewed, and renewal is not always guaranteed. If you become ill, for example, the insurance company may refuse to renew your policy. Also, as you age, the premiums for a term life insurance policy will almost always increase.
- Unlike other types, the policies do not accrue equity for the insured, and the policies have no cash value.
Whole life insurance is a permanent policy in which both the premiums and death benefit are fixed for the duration of the policy. As long as the premiums are met each year by the insured, the beneficiary will be eligible to collect the death benefit.
It is also referred to as a cash value insurance, because part of the premiums paid each month are placed into interest bearing savings which are managed by the insurance company. These funds can be borrowed against or used as collateral to secure another type of loan.
Note that the funds in the insurance should not be considered as an investment because any loans or withdrawals will reduce your death benefit. If you withdraw an amount exceeding the premiums you have paid the policy, you will have to pay taxes. Also, every year you own the insurance, more of your premium goes to pay for the cost of insuring you instead of the cash value.
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The premiums for whole life insurance are significantly higher than term life insurance premiums, not only because the death benefit is fixed, but also because there is a management fee built into the premium price structure.
A medical exam is often required by the insurance company before issuing an insurance policy. The examination covers your blood pressure, weight, height and medical history. Smokers usually end up paying more for the insurance.
Most experts agree that, if you can afford the higher premiums, whole life insurance is a much more attractive option, largely because of the added security and cash value these policies offer. For younger people just starting out, however, term life insurance is an affordable vehicle for ensuring your family is protected.
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