How to Face Your Life Insurance Choices
How can you decide what kind of insurance is best for your family? A closer look at term and whole-life insurance will help in deciding between the varieties.
Term life insurance is the lower-cost option. When you buy a term life insurance policy:
- The period of protection is temporary — 10, 20 and 30 years are most common. After the term runs out, you have the option to renew, but the rate may be quite expensive.
- Term life policies do not accumulate cash value, so if the policy is active when you die, your beneficiaries collect the death benefit. If the policy "expires" before you do, the life insurer has no further obligation to you. That's why term life insurance costs less than whole-life insurance does.
- With level premium life insurance, the premium stays the same for the initial term and the death benefit remains the same.
- With decreasing term insurance, premiums remain the same but the death benefit is reduced every year.
Term life insurance meets your temporary insurance need. You can buy term life that is designed to replace your income for your family. For example, if it expires in 20 years, you'll probably have relatively few years of income that would need to be replaced.
Whole-life policies offer lifelong protection, but at a higher price.
- Whole-life protection is designed to protect you for your entire life.
- Premiums are higher to compensate for the higher mortality risk in your later years.
- Whole-life policies accumulate cash value over time and can be included in retirement planning.
- You can borrow against the policy.
The purest form is known as traditional ordinary life, or straight life, which has a fixed premium guaranteed until age 100, when the cash value equals the death benefit. If you're still alive, you get the money.
- Limited pay — premiums are paid for a certain amount of time, for 20 years or until age 65. Premiums are higher because you're paying for a limited time.
- Single pay — a single lump-sum premium is paid at the policy's inception.
- Graded premium — premiums gradually increase over a certain period of time.
- Adjustable life — the death benefit or premiums may be modified over time.
Whole-life policies are good for a permanent insurance need. If you'd like to leave your heirs $500,000 whenever you pass away, this kind of policy will ensure that will happen. And whole-life policies can be used as savings vehicles and borrowed against, if necessary.
Buy the amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now — child care, for instance. Whole-life insurance provides lifelong coverage and includes an investment component known as the policy's cash value, which grows slowly on a tax-deferred basis, which means you won't pay taxes on its gains while they're accumulating. You can surrender the policy for cash — but you'll no longer have coverage.
Whole-life policies pay dividends, which are not guaranteed. Dividends can be used to reduce the premium or build up the cash inside the policy and grow the death benefit. Term options have little or no dividends. Term life can be automatically converted to whole-life.
Through understanding the advantages and disadvantages of the two basic products, you can do a better job of making life insurance purchase decisions.