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Term Life Insurance Vs. Whole Life: Which Is A Better Option?
The prospect of buying life insurance doesn't excite many people. Its purpose is to make up for a loss of income in the event the insured dies. Upon the insured's death, a death benefit is paid to the policy's beneficiaries.
The policy itself is a contract. You agree to pay premiums to an insurance company in exchange for a death benefit to be paid to your beneficiaries if you pass away while the policy is in effect.
For most people, it's a fair deal. The question is, which type of life insurance - term or permanent - should you purchase? They are different products that meet different needs. Each comes with its own set of pros and cons. In the present article, we'll explore those pros and cons and provide a balanced view of a topic many people find to be unpalatable and confusing.
Term Insurance vs. Permanent: A Bird's-Eye View
Term life insurance provides protection from a loss of income over a specified period. That period is measured in years with policies ranging from 10 to 100 years. Most people who purchase this type of insurance choose contracts that last for 10, 20, or 30 years.
The premiums remain level while the policy is in effect. When the policy expires, the insured can purchase a new one. The premiums will be higher since the insured is older and the likelihood of passing away is greater.
Permanent life insurance provides protection throughout the insured's life. It does not expire like a term policy. Depending on the type of product - i.e. whole life or universal insurance - the premiums remain level or rise and fall according to the insured's wishes.
Permanent insurance comes with features that are not found in a term insurance contract. For example, it has a tax-deferred savings component. It allows the insured to build the policy's cash value over time. The cash value is returned to the insured if he or she ever decides to cash in the policy. Another option is for the insured to take out a loan against the accumulated value, leaving the policy in effect.
Reasons To Buy A Term Life Insurance Policy
The biggest advantage to buying a term insurance product is that coverage is inexpensive compared to permanent insurance. That gives you more flexibility to buy a product that is tailored to your needs at the time of your purchase. You can buy a 10-year term policy today and re-evaluate your needs when it expires. Term life insurance makes it much easier to customize your coverage based on your personal circumstances.
In addition, the money you save as a result of paying lower premiums can be spent on other things. For example, you might want to buy a new car, start a business, or sock away cash for a family vacation. Again, you enjoy more financial flexibility.
Downsides Of Term Life Insurance
One of the disadvantages to a term life product is that it expires. When it does so, you can renew it, but you'll need to pay higher premiums. As noted earlier, the likelihood of dying increases with age. The higher premiums you'll pay reflect the increased risk of death.
Another drawback is that you'll likely need to undergo a medical exam each time you renew your policy. The examination will include a basic physical and blood work. A urinalysis may also be done, and you might be asked to perform basic exercises - e.g. walking on a treadmill - while connected to an EKG. The medical exam is done so the insurer will know whether certain conditions lower your life expectancy. Most people find it to be an inconvenience.
Reasons To Buy A Permanent Life Insurance Policy
Many people enjoy knowing that their life insurance premiums will remain level throughout their lives. That makes it easier for them to plan their household budget. A permanent insurance product accommodates this desire.
In addition, the tax-deferred cash value of a permanent policy holds appeal for many individuals. They like the idea that their policies will help them to build wealth over time. For them, a conventional savings account is less appealing because it lacks the tax-deferred status of their insurance policy. That status can play an important role in an estate planning strategy designed to pass the insured's wealth to his or her family.
Downsides Of Permanent Life Insurance
The biggest disadvantage of buying permanent life insurance is that the coverage is much more expensive than term life insurance. The higher cost is linked to the product's advantages.
For example, consider the policy's cash value. As already noted, it grows over time. But its growth is funded by a portion of the insured's premiums. That means the premiums must be sufficiently high to fund the policy's savings component while also paying for the death benefit.
Likewise, the fact that the premiums remain level throughout the insured's life may be an appealing feature. But it too reveals the comparatively higher cost of permanent insurance. Term insurance premiums start out much lower. Even though they increase when the policy is renewed, the insured will pay less for coverage over the long run. This is easy to understand since a term policy does not include a savings component.
Choosing An Insurance Product That Meets Your Needs
Every situation is unique. As such, only you can decide whether term life insurance will meet your needs more effectively than permanent life insurance. To be sure, some individuals will be better served with a whole life or universal policy.
The most important thing you can do is determine how much coverage you need and consult a qualified, licensed life insurance advisor about your options. You can start the process on this site or by giving us a call at your convenience.
Disclaimer - The above description/explanation is intended as a guideline only, and is not to be interpreted as a recommendation to buy or sell any insurance products, or to provide legal or financial advice of any kind. Also, Kanetix Ltd. does not warrant or assume any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed.
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