Understanding the Whole Versus Term Life Insurance Question

By admin in life insurance

Aug 3

When individuals start looking for life insurance quotes, they immediately discover the controversy over what constitutes the best coverage, whole or term. First, let’s get the definitions straight.

Whole Life Insurance

These policies are, as the name implies, in place for the duration of the policy holder’s life and require yearly premiums to maintain the coverage. Regardless of the state of the individual’s health, however, coverage can only be terminated if the premiums are not paid. In addition to a death benefit, whole life also carries “living benefits” including cash value accumulation and earned dividends that have a real world value. For instance, the policy holder has the option of borrowing money against the cash value of their coverage making whole life insurance an equity generating vehicle in addition to its stated purpose of paying a benefit in the event of the death of the insured.

Term Life Insurance

Again, as the name implies, this coverage is for a stated period or “term” and may be continued or discontinued as the holder requires. It is a less expensive form of coverage and the benefits do not appreciate in value over time. The premiums, however, do typically increased at given intervals of a year, five years, and so on. In most cases, term insurance is used to supplement permanent insurance during periods that can be defined as “high need,” for instance when the holder’s children are small or when the insured person will be engaged in a high risk activity or occupation. There is a guaranteed death benefit, but no additional benefits.

Frankly, there is no one right answer in this debate. A good bellwether to determine need is the length of time the policy will be held. If the answer is 20 years or more, then permanent or whole coverage is the answer. If in that 20-year period you take a high risk job, there’s no reason a term policy cannot also be taken out for a limited period. Everything depends on individual need and circumstances.

Assess Individual Need

Don’t forget to factor in the future financial needs of your family in determining the size of the life insurance policy to acquire. Think about things like the cost of a college education, the cost of burial, the amount of taxes that will be owed on your estate, and so on. Also be aware that there are different kinds of whole life insurance products including:

Traditional Whole Life: Guaranteed annual premium and minimum guaranteed cash and death benefit values. Most earn dividends that can be used to increase the cash and death benefit values.

Universal Life: Allow for variable premiums from year to year and under certain circumstances premiums can even be skipped. The policies carry maximum guaranteed premiums and minimum guaranteed cash and death benefit values. These policies earn interest rather than dividends.

Variable Life: These policies are for individuals who are financial knowledgeable and are willing to accept a degree of risk. They carry guaranteed annual premiums and a guaranteed minimum death benefit, but the cash value of the policy depends on the investments to which it is tied.

Life insurance policies are designed to create peace of mind for the holder and safeguard the future of that person’s family and interests. Not all all life insurance is identical, however and the trick is to get the policy or policies best suited to your individual needs and goals.