Should I Buy Term or Whole Life Insurance?
by, 02-07-2017 at 10:19 AM (450 Views)
I get it. Insurance, no matter what kind, is always a tough topic to broach. It’s an expense from which you don’t derive any immediate benefit (except peace-of-mind), and when it comes to life insurance, the discussion becomes even more difficult because it means addressing some uncomfortable questions.
Still, as unpleasant as the topic may be, a life insurance policy is an essential part of any financial plan. Let’s take a look at some key points to consider when buying life insurance.
First, there are two major classifications: term and whole life. While I heavily favor term, whole life can be a powerful tool in your financial toolchest.
Term Life Insurance
This is by far the easiest to understand and is the best choice for many situations. You buy a policy, pay the monthly (or quarterly, or annually - whatever floats your boat) premium for a specified period of time (the ‘term’), and if you die while the policy is in effect, the insurance company pays a death benefit to a named beneficiary.
As is the case with car and homeowner’s insurance, the best case scenario is if there’s never need for the insurance company to pay anyone a dime. However, knowing that your family will have the financial resources they need in the event of your untimely demise means that you have one less thing that to prevent you from getting a good night’s sleep.
Whole Life Insurance
On the other side of the ring is permanent, or whole life, insurance, so called because the policy remains in effect for your entire life - or at least as long as you continue to pay for it. Unlike its cousin, term, whole life can get awfully complex. Let’s tackle some key terms (no pun intended) before we discuss the merits.
There are two key parts to a whole life policy: the death benefit and the cash value. Part of the premium you pay funds the death benefit, and if you stripped away everything else, you’d pay more for the whole life policy simply because odds are that it will cover you for a longer period of time. But wait, there’s more.
The other part of your premium goes to what’s called the “cash value” which is essentially a savings account that earns interest over time. Unfortunately, it takes at least a year until you will have any cash value to speak of.
Why? Because that fat premium you’re paying is used for the fat commission your insurance salesperson just got paid to sell you that expensive policy. And that, my friend, is why you’ve at some point been pitched a whole life policy by your product-pushing “financial advisor”.
Now, before we close the book here, there are certain situations where buying permanent insurance might be appropriate for your situation. For instance, there are newer policies which have a feature whereby you can access the death benefit early to pay for long-term care. Also, whole life policies can be used as an effective wealth transfer vehicle under certain circumstances, and in some states, they can also provide some degree of asset protection from creditors. Finally, whole life policies are also widely used by business owners in buy/sell agreements.
As you can see, there are certain situations where a permanent policy may be the right solution for your particular situation, but frequently, your life insurance needs (if you indeed have the need for life insurance) can more than be served by a simple term policy.
From the Author of RevShark's TSP Timing Premium Service