Level Term Vs. Whole Life Insurance
When it comes to which type of life insurance to buy, only the consumer can say which one will really be the better deal for his situation. Before making that decision, however, it will benefit you to know the differences between whole life insurance and term life insurance. Whole life insurance provides coverage for life and has a cash value built in that can be borrowed. Term life provides coverage for a set number of years and is only insurance, without any frills. With "level term" insurance your premiums stay the same, or level, for the entire term.
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Significance
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Besides being cheaper, term life insurance offers pure life insurance without any frills--or hidden costs. A consumer can purchase many more times the coverage with a term life insurance for the same cost of a standard whole life insurance policy. Dave Ramsey, a financial expert who created the Financial Peace University, says that a 30-year old man could buy about $125,000 of whole life coverage for $100 per month. With term life insurance, however, it would only cost about $7 for the same amount of coverage.
The premium will rise when the term expires and a new policy is purchased because premiums are based on age and health. Cash can be put into savings or an investment plan of choice, and very little money goes to commissions that way, Ramsey advises.
On the other hand, a whole, or permanent, life insurance policy provides the owner with a level premium, a cash value, and a level face value. Most--if not all--the extra money above the cost of the insurance goes to commissions for at least the first year. In the above illustration, Dave Ramsey goes on to say that $93 out of the $100 in premiums would go, for up to three years, into paying the price for commissions and other expenses.
Time Frame
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One of the main reasons why people buy permanent life insurance policies is because of the cash value. The cash value of a whole life policy starts building about the second or third year, and then accumulates up to the value of the policy.
If the cash value is ever withdrawn from the policy, then it is subtracted from the face value of the insurance policy. In addition, there will be an ongoing interest charge of about 8 percent until it is repaid. In the event of a death, both the borrowed money and the interest are subtracted from the amount the beneficiaries receive.
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Effects
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When it comes to length of coverage, a whole life insurance may be a better option. A whole life policy is good up until about age 75, and some provide coverage up until age 100. Some whole life policies pay out dividends, and others may have a paid-up feature, where enough interest is generated from the cash value that it can pay the premiums each month.
Once a term life insurance policy expires, a new policy will have to be purchased and premiums are recalculated according to the owner's new age, which makes the policy more expensive.Term life policies are usually convertible to a whole life policy at any time.
Considerations
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When it comes to the cash value portion of a whole life policy, remembered that upon death, the beneficiaries will only receive the face value of the policy. This means that any "savings" hoped for is completely lost if the insured dies. In a term life insurance policy, however, the face value is received, and any separate savings amount (if there is any) is passed on, too.
If you were to buy term life insurance, and take the difference in cost between a term and whole life policy and invest it separately, the amount of money accumulated over a 20 or 30 year span could be tens of thousands of dollars, Ramsey said. If that money is placed in a tax-deferred instrument such as an IRA or 401(k), it gains even greater value.
Warning
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If you are considering a whole life policy and are interested in it as an investment, be prepared to keep on paying the premiums. An actuary for the Consumer Federation of America, James Hunt, has analyzed thousands of policies. He says that a whole life insurance policy rarely yields a reasonable return until it is owned for at least 20 years.
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References
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