Wednesday, June 15, 2022

What Is Whole Life And Term Life Insurance

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Term Vs Whole Life Insurance Definitions

Whole Life vs Term Life Insurance | Life Insurance Comparison

Shopping for life insurance can be confusing if youve never investigated it or havent purchased it before. This can be especially true when comparing term vs whole life insurance. But while the two types of policies both leave benefits after youre gone, they are very different.

Understanding these differences is crucial to picking a life insurance policy thats right for you and your family. Knowing the pros and cons of each will help you make an informed choice and protect what matters most. Lets look at them now.

It Can Support Your Estate Plan

Estate planning is a common use for whole life insurance. People with a high net worth, who have a complex end-of-life financial strategy, may want to consider a whole life policy . Adults with someone who will always be financially dependent on them, like a child with special needs, also find this policy useful.

When Should You Buy Both Term And Whole Life Insurance

You might consider buying both term and whole life insurance when youre under-insured or pursuing a more complex financial strategy. When you buy both, it means you will have two different premiums to pay. It will also add an extra step to executing your estate when you die. Despite this extra work, the benefits of having both policies might be worth it for some people. Here are three scenarios where it may make sense for some people to consider purchasing both term and whole life insurance:

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Picking Life Insurance Beneficiaries

When you buy a policy youll choose a life insurance beneficiary to receive the death benefit. You dont have to split the payout equally among beneficiaries. You can designate the percentage for each, such as 75% to Mary and 25% to John.

Its also a good idea to also designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.

Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. Its wise to check once a year to verify your beneficiaries still reflect your wishes.

Should I Convert My Term Life To Whole Life

Common Types of Life Insurance Infographic

Most term life insurance policies are convertible to whole life policies. When you convert from temporary insurance to whole life insurance, you will begin building tax-deferred cash value. You can take a cash value loan against the policy, withdraw the cash value or take the cash value should you decide to surrender the policy.

You can convert your policy if your life situation has changed or you retire. For instance, you may have a long-term dependent, such as a child with special needs. Or maybe youve always wanted whole life insurance but settled for term because the premiums cost less. But now your established career allows you to afford the increased premiums.

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Can You Convert Your Term Life Insurance Into Whole Life Insurance

If your term life insurance comes with a conversion option, you may be able to convert it into whole life insurance. When converting, some or all of the death benefit is applied toward opening the whole life insurance policy. You can expect higher premium payments after you convert the policy. Read our article about to learn more.

Benefits Of Whole Life Insurance Policies

Whole life policies offer consumers the following advantages:

  • The policy premiums and the death benefit payout are both fixed, adding stability to the mix
  • With a cash reserve element, the policy-holder can take out funds, or even a loan, on an as-needed basis
  • Whole life insurance policies offer the consumer a guaranteed rate of return
  • Solid protection for heads-of-household, retirees, and family members who wish to guarantee a substantial cash payout to their loved ones

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Both Can Build Cash Value

The cash value of a life insurance policy is an important way to save for the future, providing a safety net during life. You can borrow against the cash value of your policy to pay for unexpected expenses, allowing you to be better prepared for whatever lies ahead2. Whole life insurance offers guaranteed cash value build up over the life of the policy. Universal life insurance policies have the potential to accumulate cash value, but it can fluctuate over time based on how you fund the policy and other factors.

Why Get Whole Life Insurance

Term vs Whole Life Insurance (Life Insurance Explained)

One of the primary reasons to get whole life coverage is to leave your beneficiaries with a financial advantage. Since whole life policies build cash value, there is more opportunity to transfer wealth to your loved ones. Or if youre big on giving back, a whole life policy can also be used to set up a charity in your name.

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How Much Term Life Insurance Do I Need

You should get a term life insurance policy equal to 10 to 12 times your annual income. So if youre making $50,000 a year, you need at least $500,000 in coverage. That way, your salary will be replaced for your family if something happens to you. You can run the numbers with our term life calculator.

And dont forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Think about what you would pay in childcare and home upkeep costs if the stay-at-home parent was gone! You both need term life insurance.

Want to make sure your family is covered no matter what happens? Check on your coverage before it becomes an emergency. Take our 5-Minute Coverage Checkup to make sure you have what you need.

Changing Whole Life To Term Life

If youve built up cash value within a whole life policy, you can ask your insurer if you can use the cash value to switch to a term life policy thats paid up and end the whole life policy. Your life insurance company will be able to tell you the length of the new term life policy based on the money in your cash value account.

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The Difference Between Term Life Insurance And Whole Life Insurance

There are two main types of life insurance. Term life insurance offers protection for your loved ones for a specified period of time. Whole life insurance policies do not expire they are intended to protect you for your entire life. Some types of these policies accumulate cash value. Read on to find out which may be right for you.

About Term Life Insurance

How long does term life insurance last?

Its called term because the insurance lasts for as long as the term you select. Term policies pay death benefitsif you die during the period covered by the policy, proceeds will go to your beneficiaries. Term life insurance can be for as little as one year and up to 30 years. Most companies offer policies in increments of 5 or 10 years, so you can get coverage for 5, 10, 20 or 30 years, for example. Once the term runs out, youre no longer covered. If you stop paying premiums, you wont be covered, either.

Sometimes, it is possible to convert a term life policy into a whole life policy, but it depends on your insurance provider and their terms and conditions. This is one of the things to ask an advisor when considering options for life insurance.

How much does term life insurance cost?

About Whole Life Insurance

What is whole life insurance?

Whole life insurance policies pay death benefits and they may also build cash value.

What does cash value mean?

How much does whole life insurance cost?

So, should I buy term or whole life insurance?

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Term And Whole Life Insurance Alternatives

Term Life Insurance Advice from Dave Ramsey [Get his #1 Tip HERE!]

Your permanent life insurance options dont end here. There are additional alternatives outside of whole and term life insurance.

Universal Life insurance is a great option if you want part of your policy to function as a savings account. Variable Life insurance uses sub-accounts that function similarly to mutual funds. Lastly, Indexed Universal Life Insurance allows you to adjust your premiums to maximize your cash policys cash value.

These options are generally only suited for specific financial goals. Most people choose between a term or whole life insurance policy. Aflac can work with you to recommend a plan that best meets your needs.

Still have questions?

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Guaranteed Universal Life Insurance

Guaranteed universal life insurance offers the lowest risk universal life policy and is typically the cheapest universal life type. Guaranteed universal life insurance provides a level death benefit and your premiums dont change. But these policies also have minimal cash value.

Guaranteed policies additionally dont allow you to adjust premiums and death benefits, which may be an option in other types of universal life insurance policies.

When Should I Consider Permanent Life Insurance

Permanent life insurance is often selected at an early age with the intent of covering final expenses and leaving an inheritance to loved ones. Many people choose permanent life insurance to ensure their funeral costs are covered, as well as to gain more financial flexibility through the added cash value benefit. On a side note, final expense insurance can be an affordable alternative for covering your funeral costs.

In addition to the added cash benefit, whole life insurance offers set premium rates and lasts for your entire life, so you won’t have to worry about higher policy rates down the road. The same goes for a universal life policy, except you can actually change your premium payment.

If you’re still unsure what type of life insurance is right for you, talk to one of our experts at . They’ll offer advice, show you your options, and let you compare quotes.

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Cash Value May Include Fees And Tax Implications

Fees and tax implications can arise when you access the cash value of this policy. A whole life policys cash value isnt as easily accessible as the money in your bank account. Removing money can incur taxes and fees, and lower the value of your death benefit. Removing too much money can terminate your coverage.3

How Much Does Whole Life Insurance Cost

Why Is Term Insurance Better Than Whole Life Insurance?

The cost of a whole life insurance policy depends on several factors, including how much coverage you buy and other things.

When it comes to paying your premiums, you’ll typically be able to make a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly or twice a year. Be aware, however, that paying premiums more frequently than once per year may incur additional fees.

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What Is The Difference Between Whole Life And Universal Life Insurance

Youre thinking about life insurance to protect your family. Thats great! The right policy can give you the peace of mind that comes from knowing your loved ones will be safe and able to maintain the life they are accustomed to should something happen to you.

Well be the first to admit that life insurance choices can be confusing. There are different terms and options and opinions. Dont let that stop you.

While there are dozens of names and ways to offer different life insurance policies, almost all fall into three basic categories:

  • Term Life covers a set period of time
  • Whole Life offers guaranteed lifetime protection
  • Universal Life offers a flexible long-term option
  • This article will cover the similarities and differences between whole life insurance and universal life insurance.

    Cash Value Accumulation In Whole Life Insurance

    Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed.

    Similar to a 401 or IRA, the money in the cash value account grows tax-free. However, if you take out cash value that includes investment gains, through a policy withdrawal or loan, that portion will be taxable.

    The accumulation of cash value is the major differentiator between whole life and term life insurance. While actual growth varies from policy to policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go to the cash value only a small portion. The rest goes to paying for the insurance itself and expense charges.

    Most whole life policies have a guaranteed return rate at a low percentage, but its impossible to know how much your cash value will actually grow. Thats because most insurance companies that sell whole life also offer a non-guaranteed return rate of return based on dividends. You can choose to apply your dividends to cash value every year, but you cant know how much that will amount to over time.

    In my experience, having reviewed several dozen policies, guaranteed rates of return are often 1% to 2%, with non-guaranteed rates at about 4% to 6% annually.

    Its unclear what percentage of policyholders get returns closer to the non-guaranteed rates.

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    The Questions To Expectand To Askbefore Getting Life Insurance

    Be prepared to answer questions about your medical history. Regardless of the option you choose, you would need to have knowledge about your health history, as well as any genetic predispositions to diseases, like if multiple members of your family have died from a certain type of cancer, says Mitchell.

    As for what to ask, he recommends these questions before committing to a policy:

    • Based on my current obligations and financial plan, which would be the best solution for me? Would you recommend term life insurance, whole life insurance, or a combination of both ?
    • Based on my current medical history, do you know which underwriting requirements I may need to complete ?
    • Is there anything I should be aware of before beginning this process?
    • What additional riders are available with your companys policies that may be of benefit to me?

    Understanding Whole Life Insurance

    Level Term Life Insurance: What It Is and How It Works

    Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level, regularly due premium payments. The policy includes a savings portion, called the cash value, alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance.

    To build cash value, a policyholder can remit payments more than the scheduled premium . Policy dividends can also be reinvested into the cash value and earn interest. The cash value offers a living benefit to the policyholder. Over time, the dividends and interest earned on the policy’s cash value will often provide a positive return to investors, growing larger than the total amount of premiums paid into the policy. In essence, it serves as a source of equity.

    To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer. Also, the owner may withdraw funds tax-free up to the value of total premiums paid. Loans that are unpaid will reduce the death benefit by the outstanding amount.

    Whole life insurance is different from term life insurance, which only provides coverage for a certain number of years, rather than a lifetime, and only pays out a death benefit. Term life does not have a cash savings component.

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    You Are Pursuing A Ladder Strategy

    Buying multiple life insurance policies with varying lengths can be one strategy for cost savings. Usually, a ladder strategy stacks 10-, 20- and 30-year life insurance policies on top of each other. This changes the amount of death benefit available to your heirs over time. It usually provides less coverage as time passes, according to your needs. Its more complicated to manage this strategy compared to buying a single life insurance policy. There will be multiple bills to pay each month. And there will be an extra step to executing your estate when you die. But the cost savings may make the extra work worth it for some people. Whole life insurance may fit into a ladder strategy that includes permanent protection.

    When Does Whole Life Make Sense

    Given the expense of whole life insurance and that many people do not need insurance for their entire lives, it is often not the ideal product to purchase. However, there are some specific situations where a form of permanent life insurance makes sense.

    Funding a trust: Permanent life insurance can be used to fund a trust that will support children after you die.

    Paying estate taxes: For those with estates larger than the current estate tax exemption, which is $11,580,000 in 2020, permanent life insurance may make sense to help heirs pay any estate taxes due when you pass away. Some states have lower estate tax limits, so it may make sense for folks living in those states as well.

    Funding a buy-sell agreement: If youre an owner of a business with a partner, you might consider whole life insurance to fund the purchase of each others shares in the business at death.

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    What Is Whole Life Insurance

    Whole life insurance provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate on a tax-advantaged basis. These policies may be known as traditional life insurance.

    Whole life insurance policies are one type of permanent life insurance. Universal life, indexed universal life, and variable universal life are others. Whole life insurance is the original life insurance policy, but whole life does not equal permanent life insurance.

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