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Life Insurance Part 2: What type of insurance?

Updated: Oct 11, 2023

There are two main types of life insurance: term and whole.

Term Life Insurance

  • Coverage Period: Term life insurance provides coverage for a specific term, usually ranging from 10 to 30 years. Once the term ends, the coverage expires, and there is no payout if the insured person is still alive. It is pure death benefit protection with no cash value component.

  • Affordability: Term life insurance is generally more affordable than permanent life insurance policies, especially in the early years of the policy. The premiums are fixed for the duration of the term, making it easier to budget.

  • Death Benefit: If the insured person dies during the term of the policy, the designated beneficiaries receive the death benefit payout, which is typically a tax-free lump sum. This payout can be used to cover living expenses, outstanding debts, mortgage payments, education expenses, or any other financial needs.

  • No Cash Value: Unlike whole life insurance, term life insurance does not accumulate cash value over time. If the policyholder outlives the term, there is no return of premiums or additional benefits.

  • Suitable For: Term life insurance is ideal for individuals who have specific financial obligations or dependents that need protection for a limited time, such as paying off a mortgage or providing for children until they become financially independent.

Whole Life Insurance

  • Lifetime Coverage: Whole life insurance is a type of permanent life insurance that provides coverage for the entire lifetime of the insured, as long as the premiums are paid. There is no specific term or expiration date.

  • Cash Value Component: One of the significant features of whole life insurance is its cash value component. As the policyholder pays premiums, a portion goes into a savings or investment account, which grows over time on a tax-deferred basis. This cash value can be accessed through loans or withdrawals during the insured's lifetime, though doing so may reduce the death benefit.

  • Premiums: Whole life insurance premiums are generally higher than term life premiums, but they remain level throughout the policyholder's life.

  • Death Benefit: The death benefit of whole life insurance is paid out to the beneficiaries upon the insured person's death. The amount is usually a tax-free lump sum and remains the same as long as the policy is active.

  • Suitable For: Whole life insurance is best suited for individuals who want lifelong coverage and are willing to pay higher premiums for the added benefit of accumulating cash value. It can be a tool for long-term financial planning, providing a death benefit to loved ones while also serving as a savings and investment vehicle.

When deciding between term and whole life consider your financial goals, budget, and the duration of coverage you need.

If you need protection for a specific period and want more affordable premiums, term life insurance might be the better choice. If you want lifelong coverage and a cash value component to help with financial planning, whole life insurance could be the better option.

Typically I am a big fan of the philosophy: buy term and invest the rest.

This means buy the term policy because it's cheaper, then invest the premium savings so you have an accumulation when the term expires.

It does not mean that there are no circumstances for when you should buy whole life--it just depends on your specific circumstances.

If you have questions about what may be right for your situation I am happy to discuss.

Next post we'll start discussing how you calculate how much coverage you should get.

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