- December 28, 2016
- Posted by: Liam Dai
- Category: Uncategorized
Term or Whole Life insurance – What’s Better?
Consumers face a multitude of decisions when it comes to insurance. Often, people will purchase a policy without knowing exactly what the fine print in a contract entails. One exception to this may be life insurance, which requires solid financial planning and forethought.
However, not all life insurance policies are created equal. In this article, we’ll take a brief look at which life insurance policy is right for you and your family.
Let’s define some type common types of life insurance:
- Whole life insurance (also known as “permanent insurance”) typically provides both a death benefit (payment upon the insured’s death) and cash savings, and lasts for the insured for their lifetime.
- Term insurance provides a level premium and a level-death benefit protection for a stated period of time, such as ten or twenty years.
There are many facets to each types of insurance, but these are best viewed on a case-by-case basis.
Investment Options vs. Premium Cost
Whole life policies have a living benefit, and a tax-sheltered cash account that builds up inside. Clients don’t pay taxes on the gain each year, and that money can be used in retirement to supplement retirement planning strategies. No such benefit is available with term insurance. Term insurance only has the actual life insurance coverage; there is nothing but a death benefit. In order for the benefit to be paid, somebody has to pass.
However, the initial premium for whole life insurance is typically higher than for a term insurance policy with a similar death benefit. A portion of the premium may be invested, eventually providing a buildup of cash value. Whole life has a level premium, so if people can afford the first-year premium (which is usually higher than subsequent years), they typically can afford it in the future.
It’s up to the insured to determine if they are looking the cheaper solution of a term life insurance policy or prefer their financial investments to be tied up with their insurance policy. A whole life policy does have dividends, and the dividends are paid out much like they would be to a stockholder of a company. Those dividends can be used to reduce the premium, or they can be used to build up the cash inside the policy and the face amount. Term life insurance has little or no dividends.
Some financial advisors recommend “purchasing term and investing the rest,” as there may be a potential for higher market gains versus tax-reduction benefits. Of course, one must actually make the effort to invest, not simply choose a term life insurance policy.
For those that have whole life insurance policies, they may be able to purchase a rider to whole life policies. Riders are essentially miniature contracts within your policies contract.
One such rider is known as the accelerated benefits rider. This enables someone who has a terminal illness to be able to access as much as 2/3 of their death benefits while still alive. This is something that can’t be done with term insurance.
Other riders may include:
- Disability Income Rider
- Disability Waiver of Premium
- Term Conversion Rider
- Long-term Care Rider
- Critical Illness Rider
Depending on your health and wishes, some of these riders may ensure that you can extend your lifespan at the expense of your investment decisions.
Upgrading Your Policy?
Term life policies are colloquially referred to as “temporary life”. There’s a fixed period of time when the premium remains level; after that time elapses, the premium usually increases yearly to the point where it can become impossible to afford—or the policy terminates. The policy runs the risk of not being around at the very time it is needed — death.
However, term insurance can be upgraded if your policy has a conversion privilege, which permits you to the ability to convert the term policy into a whole life insurance policy. The benefits include not needing a proof of insurability, locking in the rate class you had at the start of your policy.
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Many term life insurance policies can be automatically converted to whole life without an exam. People won’t make the conversion simply because they weren’t properly educated about the benefits of a whole life insurance policy.
This is why having an insurance advisor can me the difference between being covered and not being covered. Contact the advisors at RiskBlock today to see what type of insurance best suits your family’s future.