Life Insurance: Term vs. Whole, Which One Works for You? – Guest Post
Life insurance is a big and important purchase and is a significant part of financial planning, especially if you have dependents that you want to take care of if you are not around. Unfortunately, to the untrained eye, life insurance is extremely confusing. Taking the plunge requires quite a bit of research, not to mention some inside insight about the way the insurance industry works, so let this post act as a beginners guide.
Let us start with the basics.
Insurance agents find people who are interested in purchasing life insurance by using life insurance leads that operate the same way as ordinary sales leads. This means that if you fill out an online form, an agent will possibly contact you.
Now, what are the different types of life insurance?
Term life insurance (the simple one) is exactly what it sounds life. You buy a life insurance policy for an amount of time determined by you and can be up to 30 years (in most states) and then it expires. It can be renewed to last until the age of 95 (in most states), but your premium will go up and your payout will go down, so factor this increase in before you make any decisions.
Whole life insurance is a totally different monster. It is called whole because it encompasses both insurance and investment. Now obviously because there is a life insurance payout as well as a “retirement fund,” the premiums are also substantially higher. The investment component of this concept is meant to act as a retirement fund. Now you can borrow money from this fund before retirement age, but only at a price, for it is not yours until it is officially relinquished to you. The investment is tax deferred meaning that they are tax free until they are withdrawn rather than compounded from the interest you make; this generally means that taxes on this type of investment will ultimately be lower.
In times of terminal illness, your life insurance can be accessed with permission from your doctor.
One of the other main differences between term and whole is that whole life insurance does not expire. It is designed to last your entire life.
So now that the basics have been covered, we can start looking at which type of insurance is a better value. Although term life insurance only lasts a fixed number of years (assuming you do not renew), premiums are generally cheap and the payout can be quite high. It is designed to have a set term so that you rely on your retirement fund once it expires. This is life insurance in its most pure form.
Whole life insurance can leave you underinsured because premiums are substantially more expensive than term since you’re also being forced to invest. And when it comes to your retirement fund, you might want to have more control over it with a better investment strategy rather than one that is forced upon you.
This post was written by Tatyana Levin, a recent graduate from University of California, Irvine, who now works as a content writer for InsuranceFiles.com.