Term Life vs Whole life Insurance

May 25, 2017

Safeguarding the future of your dependents does not begin in the future but it all begins now. That is why most if not all individuals in the working class category aim to secure the future of their loved ones through insurance products. Life insurance helps you achieve this and term life insurance is cheaper compared to whole life insurance in its own battle of term life vs whole life.

However, it is important to note though expensive, whole life insurance has other additional benefits. In the case of term life insurance, coverage is between one to thirty years and it is often referred to as the pure life insurance. The reason is because it is meant to serve your dependents in the event you die prematurely. The has no other value, which means that if you die within the term the policy covers, your beneficiaries only receive the death benefit.

It is important to opt for a term life insurance which is in line with when your family will need the funds the most such that in case you are not around, whatever you leave behind, will be able to supplement your income and serve them accordingly. If you live long enough, then such funds at maturity will serve as security for you when you finally retire.

In the case of whole life insurance, there is lifelong coverage as well as cash value, in which case, the latter acts as the investment component of this policy. No taxes are charge on your funds as the cash value grows and you can borrow against the policy, only that you will need to surrender your policy, meaning that you will remain without cover.

In the event you fail to repay this loan with the interest attached, then this will reduce your death benefit. The best thing with whole life insurance is that cash value growth and death benefit are guaranteed and premiums remain unchanged throughout your lifetime. Also, there is the probability of benefiting from the insurer’s surplus in this case, which is paid as dividends but there is no guarantee.

In the battle between term life vs whole life, Term life insurance may be cheaper but in most cases, you family will not get a payout because there is no cash value attached. It works best if;

• You are looking for the most affordable coverage available in the insurance market.
• If you cannot afford permanent life insurance but you want it because there is provision to convert most term life policies to permanent coverage.
• You are looking for a policy that will only cover a specific period such as the time to pay off your mortgage, or the time it will take to raise your children.

On the other hand, whole life is appropriate if;

• You want to equalize inheritance such as leaving one child with property and compensating that with a benefit payout for the other child.
• You wish to provide funds to pay estate taxes to avoid a case where your heirs have to sell part of the property in future to pay for such taxes in future.
• You wish to spend what you have saved after retirement and still cater for your funeral expenses because with whole life, a payout is guaranteed.
• You have a special needs child and you would want to have a fund to take care of that child.

Types of Insurance

September 13, 2016

Planning to buy a life insurance plan? Here’s what you need to know about the different types of life insurance:

Term Life Insurance

Term life insurance is the simplest type of life insurance where you buy life coverage for a specific period of time and pay a monthly premium. It only pays if death occurs during that set period, which usually ranges from one year to 30 years.

Term life insurance is the cheapest form of life insurance starting from as low as few hundred dollars a year for $300,000 worth of coverage. Term life insurance, in most of the cases, doesn’t have any investment component linked to it. You are just paying an annual premium to protect your dependents in case anything happens within the policy term.

There two further sub-categories of term life insurance:

Level term – Fixed premiums and death benefits stay the same throughout the term of the policy

Decreasing term – Death benefits decrease each year incrementally throughout the term of the policy

When opting for Term life insurance, choose a term that fits your current financial situation and figure out the number of years you and your family are more financially vulnerable.

Whole Life Insurance

Also known as permanent life insurance, whole life insurance is more expensive than a term insurance policy but has many additional benefits. A whole life insurance policy provides lifelong death coverage even if you die aged 100 and comes with an investment component known as policy cash value. You can also borrow money against the cash value of your policy plan or even surrender the policy for cash.

There are three main types of whole life insurance; traditional whole life, universal whole, variable whole life.

Traditional whole life – This is the most common type of whole life insurance where the premium stays the same throughout the policy’s term and the death benefit is guaranteed. The policy cash value also grows at a guaranteed rate and best of all, you don’t have to pay taxes on the gains while they are accumulating.

Universal whole life – This is a type of permanent insurance policy that provides the most flexibility. It provides the option of increasing death benefit later on in the policy term by passing a medical examination. The insured also has the option to change the policy premiums if enough money has been accumulated in the cash value account. The only downside with universal life insurance is that the returns are not guaranteed since it is tied to a money-market type investment that pays a market return rate – which can be positive or negative.

Variable Life Insurance – This type of permanent life insurance provides the opportunity of combining death benefits with an investment component that comprises of stocks, bonds and money market mutual funds. The risk factor for variable life insurance policy is higher but the returns can be equally rewarding as well. If the investments tank, the death benefit and cash value may decrease, however, some policies guarantee a minimum death benefit.

Variable life insurance policy also comes with great flexibility for the insured in terms of the ability to change and adjust the annual premiums. So if your financial situation changes during the policy’s term, you have the ability to increase or decrease your premium. The policy cash value account can also be used to pay the premiums, if needed. While there are certain added benefits of variable life insurance, one big downside is that the cash value returns are not guaranteed and the risk of investments lie completely on the policyholder.

Final word

Whichever type of life insurance you eventually opt for, it is essential to be aware of the risks and rewards and choose a plan that fits your current financial status and future life goals.