The two basic types of life insurance are Whole Life and Term Life. Whole Life insurance provides a death benefit and an accumulated cash value. Term Life only provides a death benefit for a specified term with no cash value.

The Whole Life policy builds cash value, which can be borrowed against. If this is your money, why do you have to borrow it; the savings was supposed to be my money! They are sometimes represented as your cash value, however they are not, they are premiums and they belong to the insurance company. If you want to take money out fof your life insurance, you have to borrow it the same as you would a bank loan. The loan interest will be about a percent less than what the bank might charge. During the first several years most of the premiums go to pay the creation costs and sales commissions, therefore no cash value is being accumulated. Afterwards you will be able to borrow from the cash value and you are guaranteed an interest rate of between 1-3%. If you should die before the borrowed funds are paid back, this amount reduces your death benefit. The sad thing is, the interest you paid doesn’t go into your cash value, it goes to the insurance company. When you die, the insurance company keeps the cash value and only the face value of the policy will be paid to your heirs. Upon your death, any borrowed money from the cash value that hasn’t been paid back will create an income tax on the loan amount.

Several basic pros and cons of whole life insurance that you should be aware of are:

• You are guaranteed coverage until you die as long as the premiums are paid.
• It has an accumulated cash value.
• Because of the cash value investment feature, the premiums are higher than Term Life.
• You receive a very low rate of return on the cash value.
• If you cancel your policy, you are subject to a surrender fee, however you will receive the cash value.
• The cash value belongs to the insurance company, you can’t draw it out the same as a saving account, you have to borrow it and pay loan interest at a little lesser rate than the bank.
• If you die, the insurance company pays your heirs the face value of the policy and keeps the cash value.

Term Life Insurance

Term life insurance provides death protection only for a specified period of time. These terms normally range from ten to twenty years. If you die before the term expires, your heirs will receive the face value of the policy. If you don’t die during the term, the policy expires with out any investment. Since you don’t have the investment feature, you get the greatest possible protection at a much lower price.

Term life insurance comes with several features such as renewable term, allowing you to renew the policy no matter what your health is. You will pay a higher premium because  you’re growing older and in a higher risk category. This is not all that bad, the mortality rates are constantly changing because people are living longer due medical technology, and this is forcing the rates to decrease. Another feature is leveled term, meaning you will pay the same premium until the end of the term. The premium is averaged with the lower premium of the early years with the premium of the later years and this establishes what you will pay.

When young families are just starting out, their budget is stretched with trying to set up a household and trying to do this on a entry level income. Term life would probably be best for them. Later when things become more financially secure, then a whole life insurance policy might be considered.

Modified Whole Life is an insurance policy that has lower premiums during the first years of the policy; however it has all the features of a regular Whole Life policy. It builds cash value and you receive dividends through the premium savings in your cash value account. The cash value funds can be withdrawn at any time for an emergency or a specific purpose. Life insurance cash value is an ideal manner to save for college tuition, a down payment on a new house, or any planned project for the future. The modified whole life policy is a notch better than Term Life in the sense that it will let you have the low term rates at first, and it has all of the advantages of a whole life policy from the start.

With this type of policy, you have the ability to make decisions regarding the cash value; you have the freedom to use them to pay for the mortgage or anything else you decide is an emergency. You also determine how dividends will be dealt with once they are declared by the company. You can also borrow against the cash value without getting hit by taxes, and when you grow older, you can use the reimbursement as retirement income.

Modified Whole life can be customized with several types of coverage’s. Some of the coverage’s which you can add to your policy include; accidental death coverage (provides death benefits in case you did not survive an accident), children’s coverage, disability coverage and living benefit.

Each of these features will slightly run up the cost, however they are worth considering and after some thought; you may find that they can be a huge advantage. Since you are benefiting from lower premiums at the beginning this will ease the pain of a little higher premium.

Modified life insurance  is a special feature of some whole life insurance policies. “Modified” refers to the payment of the premiums. Lets say that for some reason you can’t afford the premiums today, but in several years you will be able to. This policy establishes the same premium amount for three years, and then after that, the premiums will increase once and remain at that price throughout the life of the policy. The same is true of a modified five-year life insurance policy.

Whole life insurance is considered a permanent insurance because it is intended to last throughout your lifetime. It provides a death benefit along with an investment component. Part of your monthly premium pays for the insurance itself and for administrative costs, while the rest is invested; thus building a cash value over the years.

There are many types of investments that offer high yields at a higher risk and lower yields at a lower risk. Your investment in a whole life policy is low risk and has a comfortable yield. Let’s say you are a 40 year old person and you buy a $1 million policy, and the required annual premium is $17,750. After 20 years,  having invested $355,000 you have a cash value of $518,068; that’s not bad at all! The younger you are the cheaper your premiums will be, so buy while you are young. The simple logic is that a 60-year-old is more likely to die sooner than a 40-year-old thus rating the premiums much higher. Let me emphasize that whole life insurance is intended to be coverage that lasts for life, therefore, it is better to buy such a policy when you are young and healthy. Your premiums will be lower and your policy will have more time to build up a cash value.

You must not let your premiums lapse as it is critical that premiums be paid in order to keep a whole life insurance policy active. This type of coverage is typically more costly than other types of life insurance, however there are ways that you can save money. You can save by paying your premium on an annual basis rather than a monthly basis as you will drastically reduce the amount of interest that you must pay over time.

You can expect to pay a higher premium for sports such as sky diving and bike racing and others that put you at a very high risk. Since these sports come with a hefty price tag as far as life insurance is concerned, you may want to curtail this activity in order to lower your premium.

Other causes of increased premiums are medical conditions such as diabetes, heart disease and high blood pressure. It would be wise for you to seek treatment and correct any medical conditions before you apply for your insurance policy. It only makes sense that if your disease is under control, you can cut your life insurance premium by as much as 50 percent. Let me add that a non-smoker is placed in a lower risk pool and can enjoy lower premiums.

There are other types of permanent insurance other than whole life. There is universal life, variable life and variable universal life. Universal life policies allow you to withdraw or borrow against the cash value that your policy has built up, while variable life policies offer expanded investment options. Variable universal life policies combine both these options, offering expanded investment options and access to your cash value.

Whole life insurance is not just one single product as there are a number of different types. You have the traditional, variable, universal, variable universal, single premium, participating, non-participating, limited pay, interest sensitive, indeterminate and economic whole life policies. Talk to your insurance agent before making a final decision because the type of policy you purchase can make a huge difference to your financial goals. Research each of the key features and analyze your options.

What kind of life insurance should I get? What if you should die immediately, who will suffer? If you have a wife or husband and children, most likely they will be the most affected. How will your spouse be affected? Normally it is the husband or wife struggling to keep a job while taking on all of the family responsibilities alone. Without life insurance, the family left behind will have to make some severe changes to their life style.

How much life insurance you will really need depends on your family’s needs. You may want to buy life insurance so that your spouse will not have to work as long as your children are at home. You might consider buying enough life insurance to cover your children’s college educations. Also you have to weigh out if you can afford to buy enough insurance that will allow your family to maintain the same life style as when you had one or maybe two incomes. There may have to be some adjustments to a more modest yet safe and secure life style.

There are different types of insurance at your disposal. As you are weighing out your present expenses, keep in mind that there are two types of life insurance; Whole Life and Term Life. Whole life will cover you along with an investment component that will maintain benefits for your whole life with a rise in premiums regardless of what your health or age may be. You may ask the question, why you should get term life insurance, Term Life is very cheap, however it only lasts for a “term”, usually 10 to 15 years. Term will expire eventually and then because of your age, and perhaps due to a health condition you might have acquired since you purchased your policy, you could find yourself with a very high premium or maybe be considered uninsurable.

Experts debate over which is the smartest life insurance policy to buy; Whole Life Insurance is the safest while Term Life satisfies a need very cheaply but is risky. This is a decision that you will want to make after thorough consideration of all your options and possible scenarios.

Reader’s Question:

I’m quite confused as to which type of life insurance I should buy. With so many different types of insurance policies to choose from, I just don’t seem to know which one is right for me is. My cousin told me I should purchase term life insurance because it’s pure insurance with protection only with no expensive investment feature. Why wouldn’t I want an investment? Could you explain in more detail why a Term life insurance policy would be best for me?

Billy

Los Angeles CA

Term life insurance is believed to be the “most efficient” way of getting life insurance. I will be comparing whole life insurance and term life insurance to make this clearer to you.

Whole life insurance has three advantages: it covers the policy owner all throughout his or her life, so policy owners do not have to worry about renewing their policies or worry about possible health downturns which may result to an increased insurance rates; there’s cash value so it may be used as retirement investment; and it provides additional security to your beneficiaries.

Now, let’s take a look at these “advantages.” First, if your reason for getting whole life insurance is because you worry about a possible health downturn, then you can choose term life insurance that will provide you coverage until you don’t have any dependents that you need to provide security with.

Second, for the cash value of whole life insurance. The truth about whole life insurance is that although they have return of investment, it is a poor return on investment. Instead of paying more for whole life insurance, (which can be four times higher as compared to term life insurance) you might want to save your money and invest in stocks or other forms of investment which will yield higher return of investment.

Lastly, for additional protection that whole life insurance offers for your beneficiaries. Most people would only get life insurance to leave something for their dependents who are still incapable of providing for themselves. However, there are a lot more ways to secure your family in a lesser price and that’s by purchasing term life insurance.

So your cousin may be right by recommending term life insurance over whole life insurance because it’s much affordable and it will give you coverage for your love ones. Keep in mind that term has no cash accumulation value therefore you need to search for some type of investment apart from insurance.

Even if there are life insurance providers available that would give out a no medical test whole life insurance plan, exclusions are printed into majority of these plans that customers must be informed about.

You probably have seen TV advertisements which assure whole life insurance plan for people between 50 and 80 years old without undergoing any physical exams – these are called no exam life insurance plans. The following are a number of issues that you have to know prior to purchasing one of these life insurance plans.

A lot of these plans are recognized as “modified whole life insurance.” They are customized in order that the policyholder should meet particular set of provisions to be eligible for a complete payment being given out at the time of the demise of the policyholder. A number of alterations in these life insurance policies are:

1. The beneficiaries would receive an incomplete benefit or not anything at all in case the policyholder dies in the first two years of the life insurance plan being given out. Modified whole life insurance does not need a medical test since insurers either pay an incomplete benefit or not anything at all in the event of death due to natural causes in a particular time period.

2. Majority of these life insurance plans would provide full coverage for accidental death starting the day the plan is given out. That means even if you will not be covered in case of a natural death like stroke, heart attack and so on, you will be covered in case an accidental death like car accident, fall and so on. The majority of life insurance plans have exclusions for recreational activities like sky diving, bungee jumping, etc.

3. This kind of life insurance is usually very costly.