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Whole Life and Term Insurance
Whole life and term insurance policies are the two most common types of life insurance policies. Whole life policies combine life insurance and investment savings accounts in one policy. Term life insurance is what many people perceive as life insurance, because it is designed solely as a life insurance policy with no savings component.
Life insurance generally is intended to serve as financial protection for surviving beneficiaries of the policyholder. People often get some life insurance benefits through their employer, but many life insurance products also are purchased in the individual market. Though a morbid thought for some, people who are financial providers for a family should consider the financial needs of their families following premature death.
Term Pros and Cons
A term insurance policy is relatively simple to understand. Term life policies are purchased with a specific benefit payout when death occurs in a stated time frame. For instance, you can buy a $250,000 term policy for a 20-year term and pay premiums annually. Unlike typical whole life policies, a benefit in a term policy is only paid in a lump sum distribution if the insured dies within the term period. Some people consider this a bigger gamble than whole life. However, the SmartMoney website points out in its September 2008 article “Term or Whole Life?” that a young person in good health can get a term policy through the age of 50 for “downright cheap.” A negative of term policies is that premiums increase upon renewal as you age.
Whole Life Pros and Cons
Whole life insurance combines investments with life insurance. This causes some people to assume it offers a better value. When you pay premiums on whole life, the insurer invests a portion of your premiums into bonds, money market accounts, stocks and other investments. A whole life policy pays a death benefit, and you can borrow against the build-up of equity in your policy. However, Consumer Federation of America actuary James Hunt points out that investment earnings in a whole life policy build slowly. You often are better served investing on your own. He suggests that if you buy a whole life policy early and plan to carry it for at least 20 years, it might make sense.
The value provided by a whole life or term insurance policy depends on the policyholder. Someone wanting to generate some investment returns on his policy and who is willing to investment in a long-term policy might benefit more from a whole life insurance. However, a young person buying life insurance primarily to provide affordable financial protection for a family would likely benefit more from a term policy. Consulting with a life insurance specialist may help determine your best life insurance value.