Should I Get Term or Whole Life Insurance?
When making decisions about which type of life insurance, you may be confused about what type of life insurance to buy. Two very popular options are term life insurance and whole life insurance. Before you buy either type of policy, make sure you understand what you're buying and what type of policy is best for you.
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Term Life Insurance
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Term life insurance is a type of life insurance that charges a premium for a death benefit. The premium may increase every year or stay level, depending on the type of term policy you choose. Death benefits are guaranteed. This means that as long as you pay your premiums, you're guaranteed to have the death benefit stated in the policy.
With annual renewable term life, the policy renews every year. The premium increases, but the death benefit remains the same. This is because as you get older, the insurance company takes additional risk and must charge additional money to insure your life.
Level term life inflates the premium over the pure cost of insurance. Death benefits are guaranteed for a set number of years -- often 10, 20 or 30 years -- and premiums remain level for the entire term of the policy. The excess premium collected, in addition to the premium necessary to provide a death benefit for one year, is then invested to pay for the future cost of insurance in the later years of the policy.
Whole Life Insurance
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Whole life insurance is life insurance that levels out the death benefit and premium payments for your entire life, up to age 100. Like level term life, the insurance company collects premium payments in excess of the pure cost of insurance. The excess premium is invested. Unlike term life insurance, the invested premium payments are used to reduce the amount of actual life insurance being purchased, and thus used to reduce the future cost of insurance. This is accomplished by establishing a cash value reserve account. The cash value reserve builds up against the death benefit and reduces the actual amount of death benefit you pay for. Over time, the cash value may become significant, and can be used for any purpose you choose during your lifetime.
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Benefit
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Term life insurance is beneficial for you if you need life insurance for a short period of time, or do not envision needing life insurance after you retire. Whole life insurance benefits you if you want life insurance to last until age 100. Whole life is also beneficial if you think you need or want a savings component with your policy. The savings component grows tax-free, and can be borrowed against on a tax-free basis as long as the policy remains in force.
Disadvantage
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The disadvantage to term life insurance is that you may not get the opportunity to renew your policy. If you decide later on that you would rather have your life insurance policy renewed, you may not qualify for renewal if your health has deteriorated or you cannot afford the renewal premiums. The disadvantage with whole life insurance is the high premiums that are initially required to pay for the policy. This may prevent you from purchasing the amount of death benefit you need for your family.
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