Whole Life
vs. Term Life Insurance
If you are in the market for Life Insurance, you have
probably questioned, "Should I get Whole Life or Term Life?" The answer to
that is simple: It depends. Typically, Term Life Insurance is the way to go
for most of us, however, there are some instances where Whole Life Insurance
is the superior choice.
First, we need an understanding of each type. Term Life
Insurance simply pays your pre-selected beneficiary the amount of insurance
purchased upon your death. For example, let's say you are 35 years old and
begin a $250,000/20 year policy; you pay the same agreed upon amount for the
next 20 years. Typically, if you are a non-smoker and in good health, this
should be under $30 a month. If you should pass away anytime within that 20
years, the insurance company pays your beneficiary $250,000. If you don't pass
away during the contracted 20 years, the agreement ends and you select to
begin a new policy, most probably at a higher rate because you are now a
greater risk.
Whole Life, on the other hand, not only includes the
death benefit of term life but also incorporates a investment/retirement plan,
however, the premiums are typically much higher. For example, using same
information from above, you would receive the same death benefits, however,
you would also build up money in an investment account that you could use to
help fund your retirement. The big difference, however, is that Whole Life
insurance is not contracted for a set number of years, what you pay today will
be the same amount you pay 50 years from now.
Now, let's look at specific benefits of each:
Term Life
- Lower monthly payment
- Only paying for life insurance
- You could use the money saved from the difference of Whole Life to make
your own, better investments
Whole Life
- Forced savings plan
- You can borrow from your 'investment' in case of an emergency
- Payments are the same for life, they don't increase as you get older
- Payments may be higher in the beginning, but will equal out or be lower
than Term Life as you get older and become a greater risk
So, which one is better? Again, it depends on your situation. If you are a
younger person who is not prone to save and invest towards retirement on your
own, and expect to live a long life (such as if your family has a history of
long life expectancy), Whole Life may be the best choice for you. It allows
you to lock in a monthly payment now, so by the time that you are old enough
to retire you will have an additional source of income.
However, if you only need insurance for a shorter period of time, 10 to 30
years, Term Life may be your best bet. It allows you lower monthly payments
during the years when you will need the insurance the most. Typically, Term
Life is used to guarantee that your spouse and family will be taken care of
should you retire prematurely. However, with smart financial planning and
retirement preparation, Life Insurance becomes less necessary in later years
since the mortgage is typically paid for, you and your spouse have built up
money to live off of in retirement, and most of your financial obligations
have already been accounted for.
