You're not alone if the distinction between term and permanent life insurance, such as whole life, seems a little hazy. While most people are aware that life insurance pays a lump payment to their beneficiaries in the case of their death, they may not be able to explain the differences and benefits of term vs. whole life insurance. However, if you want to safeguard your family's financial future, you need to understand the principles of the some of the best term plans.
Meaning of term life insurance
A term life insurance policy does exactly what it says. It's an insurance policy that covers you for a set amount of time, usually between 10 and 30 years. It's also referred to as "pure life insurance" since, unlike whole life insurance, it has no cash value and is solely meant to pay out to your beneficiaries if you die during the term. If you get a term policy to cover your family, consider whether your family's life insurance needs will alter before the term expires. For most individuals, this means the children are grown and on their own, the house is paid off, and the surviving spouse has some money set aside as a safety nett.
Benefits of term life insurance
Term plans are also the cheapest, frequently by a large amount, due to these two characteristics, simplicity and finite duration and no savings component. If all you want from a life insurance policy is to protect your family in the event of your death, term insurance is probably the best option for you. Term insurance is usually more affordable and can last till your child becomes an adult. Thus, it is a viable solution for single parents who desire to keep a safety net for the future.
Meaning of whole life insurance
A whole life policy can be defined as a permanent life insurance, and it's termed that way because it covers you for the rest of your life as long as you pay your payments. Since, it incorporates a cash value component, it is not a "pure life insurance" plan like term. With whole life insurance, you're covered for the rest of your life. Whole life insurance provides a death benefit, ensuring that your family is protected from financial loss in the event of your death. It's also a great way to leave a legacy to your child. A policy’s cash value offers different benefits that will help you during your life. It takes a few years for your policy's cash value to build up to a significant amount, but once it does, you can borrow against it in the form of loans or withdrawals, use it to pay your premiums, or even surrender it for cash to boost your retirement income. While various types of permanent life insurance exist, whole life is the most straightforward:
- The premium will remain constant for the remainder of your life.
- The death benefit will be definitely paid.
- The cash value increases at a set rate.
Whole life insurance can receive annual dividends (a percentage of the insurer's profits) from some companies, which can enhance your cash value and provide other benefits.
Benefits of whole life insurance
The majority of whole life insurance policies are "level premium," meaning you pay the same periodic rate for the duration of the policy. Those premiums are divided into two categories. One portion of your contribution goes towards the insurance component, while the other contributes to the growth of your cash worth over time. However, as you become older, the premium is less than a usual term coverage for someone your age. "Front-loading" your insurance coverage is what it's called. You can borrow or withdraw funds from your cash value account, which grows tax-deferred, at a later date to cover expenses such as your child's college tuition or home repairs. In this way, it's a considerably more versatile financial tool than a term policy. Insurance loans are tax-free, but any investment gains from withdrawals are subject to income tax.
Aspects to consider prior to purchasing a whole or term life insurance policy
Every person is different, and the decision to buy the best term plan should be based on your personal circumstances and the items that matter to you, such as (but not limited to):
- What is your age?
- What is the state of your health?
- What are the financial requirements of your family?
- What are your children's ages?
- Are you concerned about the cost of long-term health care and the possibility of major illness?
- What is the total amount of your debts, including your mortgage?
- What are your retirement plans?
- What have you planned regarding college education for your children?
- How will you cover the costs of your funeral?
- Are you concerned about tax implications and estate planning?
- Are you planning to create a trust as part of your estate plan?
- Do you wish to donate a portion of your estate to a charitable organisation?
- Is it possible that you already have life insurance through your employer?
Since, while the cost difference between a term and a whole life policy may appear to be significant at first, when you consider all of the benefits that a whole life policy can provide over the course of your life, as well as the certainty of a payout, you may believe it is a better overall value.
Cost of each kind of policy
Many factors influence the cost of some of the best term plans; some are beyond your control, while others are. You can better grasp your options when picking what's best for you and your family by studying what factors influence your premiums before getting a life insurance policy quote. The cost is determined by your policy type (term or permanent), age, health, gender, driving record, occupation, hobbies, and the amount your loved ones would get.
Some special considerations
What sort of insurance is the best one for you? If you can only afford term insurance, the solution is simple: it's better to have any protection than none at all. For those who can afford the significantly higher premiums associated with a whole life policy, the decision is a little difficult.
Some consumers have specific financial needs that a whole life insurance coverage can help them meet. For example, parents with disabled children may want to look into whole life insurance, which covers you for the rest of your life. As long as you pay your premiums, you may rest assured that your children will get the death benefit from your policy. It can also be a useful tool for small business succession planning. Business partners may obtain some of the best term plans for each owner as part of a buy-and-sell arrangement so that the remaining partners can purchase the deceased's equity portion in the case of their death.
Possibility to add one policy over another
We've discussed how a whole life policy differs from a term policy in terms of possibilities and features, as well as how a term policy can be a more cost-effective approach to obtain a specific level of death benefit. However, regardless of whatever type of policy you hold, you may be eligible for the advantages of the other. Is that even possible?
- It's possible if your term insurance can be converted to a whole life policy. Most companies allow this, and it can be a great method to keep your life insurance policy active while also building cash worth that you can borrow against.
- You can also add a term policy to your whole life policy as a supplement. For instance, if you feel you need an extra layer of protection to help pay for your children's college education while your whole life policy is accruing cash value.
After all is said and done, which is the best term plan to purchase? In reality, there are several factors to consider in addition to the type of coverage you choose. What level of protection do you require? Is there anything else I should get to protect my family? Here's a quick way to find out the answers to all of your questions: a financial professional who will take the time to learn about your specific situation, listen to your concerns, and clearly explain the various insurance options that best suit your needs and budget from a company that has been helping families protect their assets for many years.
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.