Understanding Term vs. Whole Life Insurance Policies
Today’s blog post on Redhead Mom is about understanding term vs. whole
life insurance policies as part of a sponsored post with Mason Finance.
From the minute our children come into our lives, we are looking for ways in which we can protect them. Something that I personally don’t like to think about is death and how my children would survive if something happened to me. Nobody knows when their last day will be and preparation can not come soon enough when it comes to taking care of our family. Buying life insurance can get complicated, but if you understand the differences between term vs. whole life insurance, it will make things much easier.
Term Life Insurance
A term life policy is pretty simple in that it offers pure death benefit protection for a certain period of time, such as 10, 20 or 30 years. It is cheaper than any form of cash value life insurance, but can get expensive once insureds reach their later years. There are different types of term coverage, including guaranteed renewable, mortgage term, decreasing term and level premium term. Guaranteed renewable term life insurance guarantees that the insured my renew their policy at the end of the term with no additional underwriting needed. It’s not surprising to find out that this guarantee comes at an additional cost.
Some term life insurance policies have rising premiums or shrinking death benefits, but now there are accelerated benefit riders for an additional cost in many policies. The riders will pay out some or all of the death benefit while the insured is still living if he or she becomes disabled or diagnosed with a critical illness such as heart disease or cancer. Some term policies offer a return of premium rider for an additional cost that will refund some or all of the premiums paid into the policy when the term expires.
Cash Value Life Insurance
How about cash value life insurance? This type of life insurance does cost more to begin with, but will remain in force for the insured’s entire life as long as the premiums are paid. This type of insurance has a built-in savings account that grows tax-deferred over the life of the policy, which can then be used as retirement savings. Though more expensive, more of the cash value policies pay out their death benefits than term policies. Plus, cash value policies can eventually accumulate to the point where they become paid up, which means that you won’t have to make any more premium payments to keep the policy in force.
Cash value accumulation can eventually become a substantial asset for you after you have paid premiums into the policy for many years. And policy loans may not need to be repaid, but rather they will simply reduce the amount of cash value and face value remaining in the policy. There are several types of cash value policies.
Whole Life Insurance
The simplest and oldest form of cash value life insurance is that of whole life insurance. Its premiums and death benefit remain at a fixed dollar amount, regardless of how much it accumulates in cash value. Whole life insurance policies pay set dividends on a regular basis, which you can either take in cash, allow to grow inside the policy, decrease your premium or use to buy additional coverage.
Universal Life Insurance
Universal life insurance has flexible life insurance premiums and pays interest to the policy’s cash value. It is different in that its death benefit can fluctuate. The rate of interest that it pays will also fluctuate according to prevailing interest rates. Some universal life insurance policies pay interest that is calculated according to the performance of an underlying financial benchmark, such as the S&P 500 Index.
Variable Universal Life Insurance
Variable universal life insurance invests its cash value in a collection of mutual fund sub-accounts, which invest in stocks, bonds, cash and real estate. The cash value in this type of policy is not guaranteed and will rise and fall with the stock and bond markets. Regardless of the type of cash value insurance you have, you will be able to access the cash value in your policy at any time. You can do this either by direct withdrawal or by taking out a loan against the policy, but the death benefit will be reduced by any outstanding loan amount when the policy pays it out.
Which One to Choose
When it comes to deciding which life insurance policy is best for you, you’ll want to consider the different factors. For instance, what is your disposable income? Do you have debt obligations? What are your financial needs? Be sure to shop around online, as well as in person, so that you get several life insurance quotes from different companies before you purchase any type of coverage. Doing this will give you a better idea of what’s available. Your financial advisor or life insurance agent can also help you find the policy that works the best for you.
What is your favorite tip from this article when it comes
to choosing a life insurance policy?