If you are to provide for your loved ones after your death, it’s a smart idea to purchase life insurance. Term life and whole life insurance are two of the most common options. It’s important to understand the difference between the two products so you can make an informed decision.
The Ins and Outs of Term Life Insurance
Term life insurance is a product active for a specific term (as long as you pay the premiums). For example, if you buy a 30-year term life insurance policy, the insurance is active for 30 years. When the initial term expires, you can cancel the policy, renew it, or convert it to a whole life insurance policy, as stated by Investopedia. The policy only pays a benefit if you die.
A term life policy accumulates no value over its term; if you don’t use it, there’s no repayment of your premiums. However, this characteristic means that term life insurance is usually significantly more affordable than whole life insurance. Your premium will remain the same for the duration of your term life policy.
An Explanation of Whole Life Insurance
Whole life insurance is a product that’s effective for your entire life. Not only does it pay a death benefit if you die, but it also accumulates cash value. You can borrow against this cash value; if you have an outstanding loan against your whole life insurance policy when you die, it will decrease the amount of the death benefit. It’s also possible to access the cash value by canceling the policy entirely.
Your premium for your whole life policy will remain the same for your entire life. This longevity and the ability of the policy to accumulate a cash value means that the premium is typically significantly more expensive than a term life policy with the same death benefit.
Individuals Suited for Term Life Insurance
Term life insurance works well for individuals who only have a temporary insurance needed, as reported by the Motley Fool. For example, many individuals purchase term life insurance to make sure that their surviving spouse or family members have enough money to cover expenses associated with raising their children. A 20 or 30-year is ideal for this situation. By the time the term ends, the children should be adults capable of supporting themselves.
When Whole Life Insurance Makes Sense
Whole life insurance is a good alternative if you know that you want insurance for your entire life. This reasoning is especially strong if you have concerns over your future insurability. Some individuals use a whole life policy as a part of their estate planning. You may want to make sure that you leave your heirs an inheritance. Buying a whole life policy is a simple way to ensure that your heirs receive the sum that you want them to.
Factors That Affect Your Premium
Whether you decide to apply for term life insurance or whole life insurance, it’s important to understand what factors affect your premium. Age is one of the most important details; the younger you are when you take out your policy, the cheaper your premiums. Since women generally live longer than men, they usually receive lower premiums.
Another factor is your current health. Many insurance companies require blood work and an exam before they will underwrite a policy. If your blood work or exam indicates that you have health concerns, this will raise your premium. Your family’s medical history can also alter your premiums.
Smokers and individuals who have smoked in the past should expect to pay higher insurance premiums, as reported by Investopedia. If you engage in risky activities, like racing or mountain climbing, this can also raise your premium.
