vs. Term Life Insurance
is the right insurance for you? For most people the
answer is clear, term life insurance. Why is that
the case and what are the differences between whole
and term life?
main difference between whole vs. term life insurance
is that a term policy is life insurance coverage and
that's it. A whole life policy has an additional investment
life insurance is a hybrid policy that combines a
term policy with a variable investment piece. The
investment is typically in bonds, money market securities
and stocks. This policy accumulates a cash value.
With both policies you pay the same fixed amount over
the covered period.
and Disadvantages of Whole Life
of whole life
policy accumulates a cash value that can be converted
to a one-time cash payment or an annuity.
savings" because you are paying for insurance
AND an investment with your policy. The policy is
forcing you to set aside money for investment purposes.
- The cash
value of the investment portion grows tax deferred.
you cancel the policy, you receive the accumulated
cash or investment value. If you cancel a term
policy you receive nothing because all of your premium
payments were for a death benefit only.
can take a loan during an emergency against your
whole life insurance policy.
of whole life
premiums for whole life are expensive and typically
much, much higher than a term policy with similar
invesment returns. You can probably get better
investment returns investing the difference between
a term policy you purchase and what you would have
paid for a similar whole policy.
are quite expensive. The fees and commissions
can take 2 to 3 percent from the annual return of
the investment portion. Over time this can make a
significant difference in the value of the investment.
It is not uncommon for the first year of payments
going entirely to commissions! That's right! A 100%
returns are hard to gauge. Not only that, you
typically do not know what portion of your premium
goes towards insurance and what portion goes towards
policy should you buy?
have a financial planner look at your situation to make
the final determination, but in most cases for the reasons
above, term life is becoming the favored choice for
most people. Wealthy people however, do have a need
for whole life in some cases for their estate planning.
If you plan
on having an insurance policy less than 15 years, whole
life is probably not the right choice. This is because
the high fees and commissions, it takes almost that
long to get any worthwhile accumulated cash value in
the policy! If you cancel the policy earlier than about
10 -15 years, you have wasted a ton of cash.
If you cancel during the first few years (probably 5
or less) just about everything you paid out will be
If you did
purchase a whole life insurance policy and have held
it for 10 years or less, does not mean you should automatically
cancel it and switch to term? Maybe not. Depending on
how old you are, the costs of a term policy may be pretty
close to the whole policy you have because you have
to physically and medically requalify. At this age,
your premiums will be a great deal higher than they
would have been when you were 25.
the younger you are, the less money you have, the more
pressing your financial budget, term life is for you.
Prudently investing the difference with the money you
save with term life insurance by not buying whole life
insurance will most likely outperform the investment
component of a whole policy. If you are still unsure,
consult a financial planner to make the final determination
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