Choosing Life Insurance: The Facts You’re Missing
Life insurance can be very confusing. What is term life insurance? What is whole life insurance? How can you get the information you need and make the right decision about life insurance for you and your family or other beneficiaries? We’ll provide an overview of these two popular types of life insurance so you can get an idea of what might be a good fit for you.
Differences Between Whole Life and Term Life
Deciding whether to purchase whole life or term life insurance is a personal decision that should be based on the financial needs of your beneficiaries as well as your financial goals. Life insurance can be a very flexible and powerful financial vehicle that can meet multiple financial objectives, from providing financial security to building financial assets and leaving a legacy.
Here are some of the main features of term and whole life insurance.
- Features of term life insurance
- Provides death benefits only
- Pays benefits only if you die while the term of the policy is in effect
- Easiest and most affordable life insurance to buy
- Purchased for a specific time period, such as 5, 10, 15, or 30 years, known as a “term”
- Becomes more expensive as you age, especially after age 50
- The term must be renewed if you want coverage to be extended beyond the term length
- Can be used as temporary additional coverage with a permanent life insurance policy
- Can be converted to whole life insurance
- Features of whole life insurance:
- Covers you for life
- Provides death benefits as well as a cash value accumulation that builds during the life of the policy
- You typically must qualify with a health examination
- Can be purchased without a medical exam, but at a higher cost
- Takes 12 to 15 years to build up a decent cash value
- Can be a good choice for estate planning
- Cash value is based on how much the return on investment is worth
- A portion of the cash value can be withdrawn or borrowed during the life of the policy
- Initially has more expensive premiums than term life insurance, but can potentially save you money over the life of the policy if in force for a considerable number of years
Whole Life or Term Life Insurance Variables and Considerations
When choosing between whole life or term life insurance, there are a number of variables to take into account. A knowledgeable life insurance agent can help you evaluate each of the following aspects of your circumstances and determine whether term life or whole life is a better option for you. The factors to consider include:
- Your current age
- Current state of your health
- Financial needs of your family
- Plans for funeral and death expenses
- The age of your children
- Long term health expenses in the event of a serious illness
- Your mortgage and current debts
- When you plan to retire and the retirement plan you have in place
- Future needs of your family, such as your children’s college tuition
- Your need for an additional retirement savings plan
- Your plans and concerns regarding setting up an estate and ramifications for estate taxes
- Your intention to set up a trust as part of your will
- Whether you want to donate life insurance proceeds to a charity
- Your feelings on potentially paying into a term policy and never receiving any of that value back
Hypothetically, if you are 35 years old, have young children, and are the primary income earner in your household, you might want to consider buying a term life policy that would fully cover your family’s financial obligations.
Adding up your living expenses, your home mortgage, pay-off of all debts, and your children’s education can help you understand the face value of a policy your family will need if you die prematurely. The length of the term would likely depend on the age of your children and when you foresee them completing college.
Alternatively, you could purchase a whole life policy that will not only pay that policy face value if you should die before your children are through college, but would accrue a cash value that would provide additional benefits to your family or a growing fund of emergency money. You could also consider converting portions of your term life policy over to whole life insurance over time to build a cash portfolio for your retirement as you age.
If you are just starting to consider life insurance at the age of 60, your children are most likely grown up and on their own, and your needs are very different. You might want a small termlife insurance policy that could cover your final expenses, or you might be looking for a term life or whole life policy that could provide for your spouse’s needs if he or she lives on after your passing.
There are many creative and flexible options with life insurance that can meet your unique needs. Only a qualified life insurance professional can help you compare term life vs. whole life and determine which would be the best strategy for you.
How to Compare Term Life and Whole Life Side by Side
Now that you have a better picture of the difference between term and whole life policies, you probably want to compare term life versus whole life insurance costs. To do so, you will need to directly compare the short and long term costs of a whole life policy and a term policy, based on factors like your age, the face value of the policy you want to buy, and whether or not you are a smoker.
You may find that your out-of-pocket costs for whole life insurance seem daunting compared to term life insurance. This is because the dollars you pay into term life insurance premiums are only there to provide a death benefit to your beneficiaries if you die during a specified term, while money you invest in whole life insurance premiums builds cash value that you can use later in life or that will add to the death benefit payout. The percentage of your costs that go into your cash accrual account increases with passing years, as many of the administrative costs associated with setting up the policy and associated investments occurs early in the life of the policy.
Should You Convert Your Term Life to Whole Life Insurance?
Most term life insurance policies allow you to convert your term policy into a permanent life insurance policy such as whole life insurance. Is this the right thing to do? Some of the reasons it may be a good idea to convert your term policy to a whole policy include:
- Your term life policy is about to expire and you are in your 50s or 60s.
- You want to extend your life insurance coverage, but term insurance may no longer be available or has become very expensive due to your current age.
- You are setting up an estate, or you are concerned about estate taxes.
- You are setting up a trust in your will.
- You need a non-taxable investment option.
Converting term life to whole life insurance can be an excellent way to continue your life insurance policy and also build cash value that you can borrow from. There are many different ways to structure this type of policy, depending on your needs and goals, so be sure to work with a life insurance professional who can answer all of your questions and help you make the best choices.
Should You Buy Both Whole Life and Term Life?
You can own both whole life and term life policies at the same time. People who are looking at this option typically already have a whole life policy. However, they may find that they want additional short-term insurance coverage such as for 10 years. In this instance, buying a term policy for the amount of life insurance you need for that extra protection can be a good solution.
Or, you may already own a term policy and find that you want to invest some additional money into a long-term investment for retirement purposes or because of estate issues. In this instance, buying a whole life policy which has a cash value accumulation feature may be the way to go.
Now that you know the differences between term life insurance and whole life insurance, you can make an informed choice to find the best life insurance solution for you and your family.