A life insurance policy is a way to guarantee that your friends and family will be provided for in the event of your death. Life insurance falls into several categories, the chief two being term or whole life insurance. Because each is very different in terms of cost, length of time covered and more, it is important to consider what kind of policy is best for you.
Types
A term life insurance policy lasts for a particular period of time and is good for its face value only. For example, if a person purchases a $25,000 life insurance policy, upon the person's death, the insurance company will pay the policyholder's beneficiaries $25,000 (some exceptions and taxes may apply). In comparison, a whole life insurance policy lasts for a person's entire life and features an investment component, meaning the policy builds in cash value over time.
Time Frame
A term life policy can be purchased anywhere from one to 30 years. These policies are renewable; however, the cost associated with renewing often is higher because a person is older at the time of renewal. Term life also may not be renewable after age 75. Conversely, a whole life insurance policy lasts for the duration of a person's life.
Features
It is possible to cash or borrow against a whole life policy in order to reclaim some of your premium payments, as well as some interest earned. The interest earned on a whole life insurance policy is tax-deferred if the policyholder cashes in the policy during his lifetime. Also, the earnings are tax-free to your beneficiaries. For term life insurance, the chief feature is the face value of the policy itself.
Cost
A whole life insurance policy typically is five to 10 times more than a term life insurance policy. Because a whole life insurance policy encompasses commission costs to an insurance agent and money for investment, it is significantly higher in cost. The returns are typically low for this insurance policy, which may vary from 4 to 8 percent, which is lower than the typical return on other investment vehicles, such as mutual funds, which typically offer a 12 percent return.
Considerations
Some view term life insurance policies as a gamble because it is possible to pay the premiums on the policy for as much as 30 years, but not experience any benefits if the person passes away after the time. However, a term life insurance policy is significantly less expensive and enables the policyholder to invest the remaining money in a fund that will pay more than a whole life insurance policy.
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