Term Life Insurance vs Whole Life Insurance
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.
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