Term Life Insurance
Term Life Insurance can be thought of as ‘temporary’ insurance. It is a policy that is for a set term or period of time. For example, it could be for a term of 10 years, 20 years or 30 years. It does tend to be cheaper than Whole Life Insurance, and there does come a time when the policy will ‘end’. If you wanted to continue with the policy at the end of the initial term, you will likely pay more to continue with it as you will now be older than when you were when you first obtained the policy. The older you are, the more it costs to have insurance.
Term Life Insurance can be a great choice for growing families during the child rearing years to help replace your income if you were to pass away. The money may be used to pay off your bills, your mortgage, children’s college costs or any other financial needs your family has. This can be thought of as a low-cost, high coverage life insurance. The premiums remain level during the term of the policy.
Some advantages of term insurance:
- The initial premiums tend to be substantially lower than whole life insurance, which means you can purchase larger amounts.
- It is a great product for young families who have limited budgets but need insurance to help cover financial needs.
- It works well when your needs decrease over time such as mortgage, college tuition and car loans.
Some disadvantages of term life insurance:
- Policies do not tend to accumulate cash value.
- After the initial term is over, your age, health and other factors tend to make the policy very expensive, sometimes too expensive to continue.
Whole Life Insurance
Whole Life is more of a “permanent” policy. It remains in effect for the insured’s lifetime as long as the premiums are paid. This type of policy accumulates a cash value. This means that you can actually borrow money from the policy to help use as collateral for a loan or pay for other things. Your premium in this policy is typically split into two parts: one part goes to pay for the death benefit and the other part is put into a separate account which builds cash value. It is the cash value part that you can borrow against, though it does take time to build enough cash value to be able to borrow.
This is a more “expensive” policy when compared to a term policy, but it does have benefits that a term policy does not. It is this type of policy, usually a smaller amount, such as $10,000 or $25,000 that you can get to help cover your final expenses. The premium can remain level during the entire policy, but there are options where you can pay the premium for a certain period of time such as 10 or 20 years. Here, your premium would be higher but after 10 or 20 years, the policy would be “paid-up”. There are different options you may have with a permanent life policy.
Some advantages of a permanent policy:
- ) It offers life-long coverage as long as the premium is paid.
- ) It accumulates a cash value that you can borrow against. The loans must be paid back with interest otherwise the death benefit will be reduced by the amount of the loan.
- ) The policy’s cash value can be surrendered for cash or you can covert it into a term policy.
Some disadvantages of permanent insurance:
- It is usually very expensive to buy a large whole life policy.
- It is more complex. Because of the various options for payment, cash values and loans against the cash value, it can be more difficult to understand.