Choosing Between Whole and Term Life Insurance

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You may dread the thought, but if you have a spouse, children and a mortgage, you need to buy life insurance. As you consider your options, you’ll quickly learn that there are two main types — term life insurance and whole life insurance. They are very different and you need to determine which one is better for you and your family.

Whole life insurance is both an investment and insurance coverage that lasts the rest of your life. When you pay your premium, part of the money goes toward your life insurance and part of it is invested by the insurance company.

The part that’s invested, known as the “cash value,” builds over time and is tax-deferred.

The face value of the policy is paid to beneficiaries upon death. If you cancel the policy, you will collect the cash value but you will probably pay high surrender charges.

You can also borrow money against the policy.

Another option is to keep your life insurance and investments separate and buy a term life insurance policy. Term life insurance is simply an insurance policy that lasts for a specific time period, usually five to 30 years. A term policy pays its beneficiaries the face value of the policy if the account holder dies while it is in effect.

The cost of a whole life insurance policy is much higher than a term life insurance policy. A $500,000 whole life policy would cost approximately $3,000 annually. It also includes commissions and fees, which are usually built into the policy cost.

Whole life insurance policies are usually promoted more than term life insurance policies because they pay higher commissions to the insurance agent or financial advisor selling them.

When you are young and healthy, term life insurance monthly premiums are low. For example, if you are a healthy 40-year-old male who doesn’t smoke, a $500,000 policy would cost approximately $500 per year. A healthy 30-year-old woman who doesn’t smoke could hold the same policy for $260 per year. As your age increases, so do the premiums.

The most important decision when buying life insurance is to figure out how much you need. A rough rule of thumb is that you should buy enough to match your annual income for at least three to five years — some financial advisors would recommend eight to 10 years. If you can’t afford to buy that much whole life insurance and aren’t looking for a tax-deferred savings vehicle, you should buy term insurance.

You can find out more about specific policies and check insurance quotes online or through a financial advisor.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/choosing-between-whole-and-term-life-insurance/.

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