When you are thinking about life insurance, which is something you should have built into your financial plan if your income is important to others, it is necessary to know the difference between the two most common types of life insurance: whole life and term life. They are similar in some ways but very different in others. Following are the basics between the two that may help you decide which is best for your needs.
Again, life insurance is a must if there are other people who depend on you for your income.
Whole life insurance is a lasting type of life insurance. This type of insurance accumulates a cash value that you can borrow against, and the benefits accrue tax deferred. Whole life insurance policies on average cost from five percent to as much as fifteen percent more than term life insurance for the same amount of death benefit. The premiums are set by accuraiests based on a chart that includes your age as well as your health and risk factors, but they are set and usually are guaranteed never to increase. But keep in mind the reason for life insurance. It is not meant to be a savings account but rather to provide for your family upon your death. You don’t want to put your loved ones in a stressed financial situation, wondering and worrying about how they will pay the bills and cover expenses. Whole life insurance policies pay out a guaranteed death benefit to the beneficiary that is usually tax free.
Term insurance, on the other hand, is written for a “term” and only lasts for a certain number of years for which the policy is written. Term life insurance policies do NOT accrue a case value amount, so you can never borrow against them. They are typically cheaper than whole life policies to purchase for the same amount of death benefit which is an added incentive over whole life insurance policies. The policy amount works like whole life policies in that the cost of the policy is based on your age, health, risk factors, and term of the policy. They are also like whole life insurance policies in the budgeting aspect with the premiums usually being able to be paid monthly, quarterly, semi-yearly, or yearly. Also like whole life insurance policies, term life insurance policies guarantee the beneficiary of the policy a death benefit that is commonly tax-free.
The amount of insurance, whether whole life or term life, should be about ten times your yearly income.
Again, think about the purpose of life insurance. You want to make sure you have enough insurance, so your family could live relatively worry-free without your income. Having a policy about ten times your yearly income is a good estimate, only IF the money is invested wisely and bills are paid properly, so you will need a good budget as a foundation.
When considering whole life versus term life, I am not a proponent of whole life insurance policiesfor several reasons. One is that they are typically more expensive for the same death benefit as term life policies, and I am not a fan of paying more money for the same product or outcome. Also, they go against the reason for having life insurance. If you are going to have a life insurance policy, I think that is what you should have. It is not a good savings investment. I have term life insurance for my wife and for me. I want to make sure that if tragedy strikes or when one of us dies, the beneficiary is able to live the same lifestyle without the income from the deceased.
Regardless of the type of policy people choose, I think it is unwise and actually foolish not to have life insurance unless you are wealthy enough that the income from the deceased is inconsequential.
Moreover, buying a life insurance policy is not a precursor to tragedy or death. It is like writing and having a will. Just because you have a will, it doesn’t mean something terrible is going to immediately happen. All it means is that you love your family enough to make sure they are taken care of when something does happen.
For help walking through the decision of what type of policy is best for you as well as the amount you should have, reach out to me. I am happy to help you through this process to ensure that your loved ones are well cared for financially.