If you passed away, would your partner or family be able to pay funeral costs, medical bills or college tuition expenses? If you answered no, then you could require life insurance. Life insurance protects a policyholder's beneficiaries from financial hardships by providing a payment upon a person's death that can help with expenses should the worst occur. Two chief forms of life insurance exist: term life and whole life.
Considerations
When considering a term life insurance policy vs. a whole life insurance policy, there are a few key items to consider. The first is cost--what will you be able to commit to paying on a monthly basis to keep your family safe? The second is duration--will you need the policy only for a short time, such as when your family is growing up, or will you need insurance for your entire life? The third is benefits--would you like your policy to have a cash value? While this may be more costly, if it is a priority for you, a whole life insurance policy is best.
Time Frame
A whole life insurance policy lasts the duration of a person's life. This means when it is purchased, a policyholder will pay a monthly premium until her death. In contrast, a term life insurance policy is purchased for a set period of time, which can range from one to 30 years. Term life insurance policies are typically a good fit for parents who want to ensure their children are cared for, yet may not need the policy for the duration of their lives.
Benefits
A term life insurance policy is one that is good for the face value of the policy. Therefore, if a person purchases $50,000 in life insurance, this is the amount the insurance company would pay to the policyholder's beneficiaries should the policyholder pass away. However, a person could not cash in this policy, nor would he receive any benefits if the policy expires before his death. By contrast, a whole life policy features a savings component to the policy, meaning it has cash value in addition to the agreed-upon payout. The investment returns typically range anywhere from 4 percent to 10 percent, dependent upon the policy stipulations.
Cost
A whole life insurance policy is as much as five to 10 times more expensive than a term life insurance policy, due in most part the savings component associated with a whole life insurance policy. A term life policy is typically the cheaper of the two forms but may increase in cost over the life of the policy. For example, a person with a $25,000 life insurance policy lasting 20 years may pay $7 per month for the first 10 years of the policy, yet increase to $15 in the next 10 years. Also, the higher the policy payout, the more costly the policy.
Misconceptions
Many people believe a whole life insurance policy's investment component makes it a better option than a term life insurance policy. However, the investment return associated with a whole insurance policy is typically much smaller than other investment vehicles, such as stocks or mutual funds (mutual funds typically pay 12 percent or more). Also, it often takes 10 years for a whole life insurance policy to begin earning money. For this reason, it's important to fully assess your life insurance needs to determine the affordability and overall benefits of either policy.
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