Term Life Versus Whole Life
The need for a life insurance policy depends on the personal situation of an individual, including his family responsibilities and other financial obligations.
A first time life insurance policy buyer may get overwhelmed by the various types of life insurance policies available. The questions that they may face are:
- Do I really need a life insurance policy?
- If so, what type of life insurance policy is most suitable for me—whole life insurance or term life insurance?
- What is the ideal amount of life insurance coverage I should get?
This sparks a debate on the choice between whole life insurance and term life insurance. Both of them have their respective merits and demerits, and the choice depends on the financial position and requirements of an individual.
The Pros and Cons of Whole Life Insurance
One of the main drawbacks of whole life insurance is it is the costlier choice between the two. But it is the more traditional form of life insurance. You get both the death benefit and the cash value, and typically, the death benefit and premium remains the same over the entire span of the policy, which is carried over during your lifetime.
The biggest advantage of whole life insurance is the policy remains effective even after all the premiums have been paid. Another advantage of whole life insurance is it builds up a cash value for you. This value is generated by the insurance company's investment of your premium.
How cash value return works:
- A portion of the income the insurance company derives from their investment is returned to you in the form of a cash value return.
- However, the policyholders have no say over how and where the premiums are invested by the insurance company.
- Nevertheless, the policyholders enjoy tax benefits with regard to cash value.
- You can also borrow a certain amount against your cash value build up until you withdraw the life insurance policy.
There are three types of whole life insurance to choose from:
- Traditional. You have the guarantee of getting back at least a minimum sum as your cash value build up.
- Interest-sensitive. Your cash back is determined on a variable rate. It has its advantages and disadvantages. On one hand, you may get an increased death benefit without an increase in the premium when the economy is booming. On the other, you may get less cash return if the economy lacks growth.
- Single-premium. These policies are targeted to a higher income group who are capable of buying an insurance policy in one lump sum. It also ensures you a cash return, and the returns are tax deferred like the other whole life alternatives.
The Pros and Cons of Term Life Insurance
One of the differences between whole and term life insurance, is the latter provides a death benefit without returning any cash value.
However, it is the one of the most recommended low cost life insurance policy options that is meant to cover the beneficiaries in the event of death of the policyholder.
The basics of how term life insurance works:
- These term policies are generally stretched over a span of time or term, say three, five or even thirty years.
- A particular amount of the premium has to be paid during this term period, which can vary with the age and health of the policyholder. Term life insurance premiums are especially low for the young and healthy policyholders.
- In the event of death during the term period, the beneficiaries receive a death benefit.
Term insurance policies are strongly recommended for those who are still young and at the beginning of their adult life, whose incomes are not high enough to afford whole life insurance, but who are married and/or have dependents.
Whole life insurance is perfect for those who have a sufficient bank balance, are a bit older, typically 40 years plus, and can afford the higher cost premium. These are also individuals who want to take advantage of the potential profit from the cash build up in the future.
Find out which works best for you, whole life insurance or term life insurance. Get your free life insurance quotes today!