Life Insurance – Whole versus Term and Choosing the Right Option

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As I get older and my family grows, one question that comes to mind is, “will they manage if something happens to me? Particularly from a financial aspect.” I can’t do much to prevent the emotional impact, but I want to ensure that my family will not suffer financially if something should happen to me. But which type of life insurance policy is best for me and my family from a cost and coverage perspective? Term or Whole Life?

First and foremost, we buy life insurance to provide for our families in case we pass away unexpectedly and cannot provide for them any longer. This may sound simple, but sometimes life insurance products are designed to do more than this basic function, and that’s where buying life insurance gets complicated.

Term life insurance is the purest form of coverage. It is purchased for a period of time, or term, and when that period of time expires, the life insurance ends. It is common to buy a term policy for 10 to 30 years, though different periods are available. So if you die you win (so to speak). If you live past the length of the policy, you (or, more specifically, your family members) get no money back. Because the policies are temporary, and only cover death benefits only, a term policy is usually the cheapest life insurance to buy, and is the choice of most younger families. Get a free quote across multiple providers for term life insurance.

Whole (or permanent) life insurance, on the other hand, is designed to cover a person for their whole life. It builds a cash value or “savings account”, and so is a combination of life insurance and savings. As long as the policy is paid for, or paid up, the coverage will be in force. Because of this, whole life insurance is more expensive. If you live, you get back at least some of, and often much more than, the amount you spent on your premium. You get this money back either by cashing in the policy or by borrowing against it

The key is how long you plan to keep the policy. Most financial advisors will tell their clients, especially younger clients, to purchase term coverage. They do this because term policies are much cheaper, and the extra money can be used for other investments that may provide better returns than whole life policies. In most cases, this is probably good advice, especially for large amounts of coverage that growing families need.

However, term policies do expire, and a middle aged or older person may find him or herself without coverage just when it is much more expensive to buy life insurance. Not everybody’s need for life insurance ends when a policy does. In a perfect world, I would suggest buying a larger face value term life insurance policy with a large enough face value to cover a home mortgage, living expenses, and education. But I would also advise many clients to consider the purchase of a smaller whole life insurance policy, especially one with a ten year payoff. That way, when the person retires, they can be secure in the knowledge that their beneficiaries will get the benefits to settle final expenses.

Related:

~ Options for Term Life Insurance Death Benefit Payouts
~ Life Insurance Reality Check – Do you have enough?
~
6 Factors that Can Increase Your Life Insurance Premium Rates
~ Protecting Your Mortgage and Other Assets with Term Life Insurance

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{ 6 comments… read them below or add one }

andys2i September 12, 2011 at 10:34 pm

The purpose of life insurance is to provide a source of income, in case of death, for your children, dependents, or other beneficiaries. (Life insurance can also serve certain estate planning purposes, which we won’t go into here.)

Buying life insurance is contingent upon whether anyone is depending on your income after your death. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance.

Because life insurance protects your family in the event of a death, it is important to determine the correct amount. Most people do not have the right amount of insurance.

There are two basic types of life insurance: term and permanent. Term insurance is insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.

Permanent insurance, such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.
Rules of Thumb

The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.

Tip: If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap.

If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.

If there are no dependents and your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.

Tip: At a minimum, you will want to provide for burial expenses and paying off your debts.

If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

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andys2i July 5, 2011 at 10:16 am

To put it more simply:

Term: Provides coverage a set period of time. If you die after the policy term, a death benefit will not be paid out.

Whole: Provides lifelong coverage and earns additional cash value over time (like an annuity)

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Sam P April 11, 2011 at 2:48 pm

This is a great post. One thing to consider is that while term coverage can be cheaper, you can also save money on purchasing whole life insurance if you combine it with other insurance policies you have taken from the same company (i.e. auto, home, health).

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Navin April 22, 2010 at 10:10 am

>Cash value life provides a variety of features and benefits in addition to the death advantage of a term policy. Cash value life insurance policies have a savings element built into the policy that accumulates over the life of the policy. The insured usually has the option to take out, invest or borrow money against the value of the cash value life policy. Term policies are usually less costlier than cash value life policies

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Jeannie April 20, 2010 at 1:04 pm

>If wealthy investors use whole life to hedge portfolio risk, so can you, explains financial advisor Andrew Rosenbaum

Turbulent financial markets and tiny yields on money market accounts are prompting savvy, high-net-worth investors to put cash into an often overlooked asset class: whole life insurance.

Long dismissed by media gurus, whole life insurance looks pretty attractive to wealthy investors these days, especially after last year's economic free-fall, explains Andrew Rosenbaum, a financial representative with Strategies for Wealth in New York City and resident of Great Neck who counts many Wall Street money managers among his clients. “It's not just Main Street investors seeking safer financial products; affluent investors want to balance risk in their portfolios, too. They’re putting cash into whole life policies because it’s the closest thing to a lock-down guarantee possible with financial contracts,” he says.

Latest available industry figures confirm this trend. Year-over-year, annual sales of whole life insurance were up 12% in third quarter 2009, according to LIMRA International. The value of coverage bought, or death benefit, increased 8% as well.

Besides buying whole life for the first time, Rosenbaum’s clients are placing more cash into existing policies through lifetime paid-up additions riders. “One client, a private equity investor, doubled his whole life coverage in 2009. He was looking for safety, but conventional ‘safe’ financial products, such as money market accounts, certificates of deposit, and treasury bills, are not generating significant yields. In contrast, he saw that whole life produces a fixed income-like rate of return plus guaranteed cash values that grow tax-deferred each year.”

Another way to all but lock-down future income is to purchase variable annuities* with guaranteed lifetime withdrawal benefits. “It is a great vehicle for 401(k) rollovers, since it can produce a predictable retirement income stream,” Rosenbaum explains. “Why leave your 401(k) account with your employer when you leave your job, when you can put that money to work for you?”

He says whole life insurance is not just an option for the rich. “Permanent life insurance is a sensible and secure long-term financial vehicle if you can afford to put away money each year and let it sit for a while to grow. It can mitigate the risk from other investments and inject certainty into your financial plan.”

About Andy Rosenbaum

Andy Rosenbaum, a financial representative with Strategies for Wealth for 33 years, is one of the Guardian's top 50 producers nationally. He is the author of The Wealth Swing Coach: A New Financial Strategy to Maximize Lasting Wealth with Certainly, Not Luck.

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Life Insurance Shop April 13, 2010 at 6:37 pm

>Read the small print! Many lower cost policies will have numerous exclusions in the small print, as with most things in life you get what you pay for!

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