How Much Money Does Your Family Need A Year
Many financial experts recommend purchasing a term life insurance policy thatâs equal to at least 10 to 15 times your annual income.
For example, if you make $45,000 a year, you may want to consider at least a $500,000 policy. This would be equivalent to just over 11 yearsâ salary.
If you make $80,000 a year, a $1,000,000 policy would be a better choice, especially if you want to maintain the same quality of life for your family.
If your beneficiary invests this amount of money in safe stocks and lives off the interest, the death benefit they receive should help replace your income indefinitely.
Term Vs Permanent Life Insurance
The primary difference between permanent and term life insurance is that term policies only provide coverage for a fixed period of time, such as 20 years. In addition, term policies dont have a cash value component.
While this makes term life insurance significantly less expensive than permanent life insurance, it also means that you will not receive any benefit if you outlive the policy. You can add a return-of-premium rider to some term policies, meaning you will receive the sum of premiums paid if you live past the term, however, such a rider increases the cost of the policy.
Term life insurance is typically the more suitable choice, since its low cost and most people dont actually require lifetime coverage. As you get older, financial obligations tend to decrease significantly, since fewer people depend on your income and more of your financial obligations have been paid off. Common financial obligations term life insurance can cover include:
- A mortgage
- A wedding
- Student loans
If youre purchasing life insurance to help your family with any of these costs, a cheaper term life insurance policy would be a better fit, since the costs would be paid over time. You can purchase term life insurance coverage for a term of up to 35 years. Even if your child was just born, you can purchase coverage that would last until she turns 25, which would ensure she would be able to pay for college were you to pass away.
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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Cash Value Of Permanent Life Insurance
Each time you pay a permanent life insurance premium, a portion of the money goes into a cash value account, and this account grows at a rate specified by the policy. Once the cash value has reached a certain size, you can borrow money from the insurer and use it as collateral.
Policy loans dont require any credit checks or qualifications since the insurer holds the money to cover the loan, and the loan doesnt have to be paid back within a particular period of time. However, you are charged a small interest rate on policy loans. In addition, if the loan plus unpaid interest exceeds the size of the cash value, your policy will lapse and you can lose your coverage. Finally, if you die before the loan is paid back, the loan amount will be deducted from the death benefit your beneficiaries receive.
For some permanent life insurance policies, youre also able to pay premiums using the policys cash value. This option is usually only available with universal life insurance policies and is somewhat risky, because your policy will lapse if its cash value reaches zero.
The cash value of permanent life insurance does offer a measure of protection as, if you ever decide to give up your coverage to the insurer, you would get the cash value back. During the first several years of coverage, there are surrender charges, so you wouldnt get the entire accumulated cash value. However, youd still be able to recoup a portion of the money youve paid.
Is Term Life Insurance Worth It
Term life insurance is a great way to ensure that your family is financially secure, even in unplanned circumstances. In most cases, term life insurance policies can be obtained at an affordable monthly rate, making this a beneficial safeguard to have.
Life is unpredictable, and if you have dependents or a spouse who requires your income to make monthly payments, you should look into term life insurance. Because you can generally predict when your children will be out of the house and when your mortgage will be paid off, you may choose to purchase a policy that only provides coverage during this period of time.
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Is Whole Life Insurance Worth It
Whole life insurance is a good idea to secure if you are looking for an income replacement but also find value in having a forced savings component built into the policy.
You may choose whole life insurance because you want peace of mind with coverage for your whole life, or because you have an existing medical condition that makes it difficult to get term coverage.
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Dont Wait Until You Need Life Insurance To Get It
Look, this stuff isnt easy to think about. But the truth is, life is precious! We cant see the future and arent promised tomorrow. The cost of not having a plan in place for the unthinkable is much higher than the cost of term life insurance. You need to keep your loved ones protected.
The ideal time to buy life insurance is when youre young and have a clean bill of health, especially because life insurance companies are all about weighing the risks of the person purchasing the policy.;If youre in the market for new life insurance or want an expert to talk to, we recommend RamseyTrusted provider Zander Insurance. Dont let another day go by without being protected.;Start here to get your term life insurance quotes.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Term Versus Whole Life Insurance
Lets compare the differences between term and whole life insurance.
Cost is the first major difference between the two. Term life insurance premiums are generally cheaper than whole life insurance policy premiums assuming you are in good health. Should you pass away during your chosen term, the death benefit your beneficiaries receive is larger compared to a whole life insurance plan as well. Should you expect to live well past your term, most policies can be converted to a whole life policy if you sign up before the deadline.
Whole life insurance has set premiums for your entire life, but the monthly payment amount is typically higher than term life insurance premiums.; Though there are numerous drawbacks, whole life insurance is a good option for many people particularly those who have life-long dependents with special needs.
Another key difference between whole life insurance and term life insurance is that a whole life account accumulates cash value with each payment, but there are generally better ways to invest your money.;
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Whole Life Insurance Vs Term
Whole life insurance is a type of permanent life insurance that provides a death benefit and accumulates a cash value. The primary difference between whole life and term insurance is the duration of the policy. A whole life insurance policy ends when you die, while a term life insurance policy lasts for a pre-determined period of time. Another important distinction of a whole life policy is the cash value that accumulates over time. You can borrow against the cash value if you need money for an emergency, or your beneficiaries receive it after your death.
The Reality Of Whole Life Insurance
- Higher initial premiums.;Whole life insurance has a higher initial premium than an equal amount of term insurance, but don’t confuse cost with value. The benefits of lifetime coverage, and over time the guaranteed cash value and the eligibility to earn dividends, makes whole life a good choice for building an additional asset class and for providing for lifetime needs.
Good financial decision-making is based on solid research and sound advice. If you’re considering term life insurance vs. whole life insurance, be sure to discuss your options with a State Farm® agent and consult your tax and legal adviser regarding your situation.
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Tax Benefits Of Permanent Life Insurance
The death benefit for both term and permanent life insurance is paid to your beneficiaries free of income tax. However, permanent life insurance has a few tax benefits that arent available with term coverage:
- The cash value for permanent life insurance policies grows tax-deferred, similar to gains in a retirement account.
- If you receive dividends or surrender your coverage, there are no income taxes unless the amount you receive is greater than what youve paid in premiums.
- There are no taxes if you take out a policy loan, so long as the policy remains in effect . While youre not taxed on other types of loans, this is important in the context of policy loans as you arent actually required to pay the money back to the insurer.
Term Vs Whole Life Insurance
Whole life and term life policies have one major thing in common, they both pay a death benefit. If you have a $100,000 term life policy and die during the term, your beneficiary will receive $100,000.
Likewise, if you purchase a $100,000 whole life policy and continue to pay the premium until you die, that policy will pay $100,000.
|Why choose term life insurance||Why choose whole life insurance|
|Lower cost for term vs whole life||Cash value and potential for dividends|
|Good health history could waive medical exam||Eligible to take a loan against the cash value|
|Young applicants get best rates, as long as they are healthy||Young applicants get the best rates|
|Flexible choice of terms|
Whole and term life policies also approach an applicants age in a similar way. With both types of life insurance, you will pay a lower premium if you purchase a policy while you are relatively young. If you wait until you are in your 60s, you will pay a much higher rate or may not qualify due to a medical condition.
When comparing term vs whole life insurance, the two types of policies have a few significant differences. Term life only covers you for the length of the term, while whole life continues to cover you until the end of life. Most term life policies require a medical questionnaire or passing a medical exam to qualify, while whole life policies usually do not require an exam for people under 50.
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Differences Between Term Universal And Whole Life Insurance
Life insurance is not one-size-fits-all. You have quite a few options when it comes to life insurance. Which type is best for you?
For most families, term life insurance is the best option because its the most affordable and its straight-forward. Permanent life insurance products, like universal life insurance and whole life insurance, are more complex, have many features, and are more expensive.
Well discuss the differences and benefits of these different life insurance products today so you can make an educated decision for yourself.
Cost Comparison: Term Vs Whole Life Insurance
Lets say we have a friend named Greg whos in his 30s and wants to secure $250,000 of life insurance for his family. He meets with a whole life insurance agent who pitches a $260-per-month policy that will include the insurance coverage, plus build up savings for retirement . ;
On the other hand, a term life agent tells Greg he can get a 20-year term with $250,000 of coverage for about $13 per monththats a $247 difference compared to whole life.
If Greg goes with the whole life, cash value option, hell pay a hefty monthly premium. But its because the part of his premium that isnt insuring him is going toward his cash value investment, right? Well, youd think, but then come the fees and expenses . . .
In truth, the additional $247 per month disappears into commissions and expenses for the first three years.;After that, the cash value portion will offer a horrifically low rate of return for your investments .1
You see, only Greg was entitled to the money in that savings account, so he would have needed to withdraw and spend it while he was still alive. Talk about pressure! Unfortunately, Greg died before he had the chance. Now Greg is rolling in his grave as his insurance agent is staying in a five-star resort on Gregs dime.
Lets recap term vs. whole life insurance by looking at the pros and cons.
- Is way more affordable
- Gives you the option to invest however you prefer
- Allows you to move toward becoming self-insured
But whole life:
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Are There Drawbacks To Permanent Life Insurance Like Whole Life
One of the big negatives of whole life insurance is that, depending on your age, health, and other particulars, the premiums could be five, ten, or even fifteen times higher than for term life insurance.;
Some people find the payments so high that they eventually let the policy lapse. In that case, they may want to simply walk away with the cash value of the policy, but keep in mind that there are penalties if you do that.
Remember, too, that risk and return are generally inversely related. The cash value a whole life policy accrues is based on a guaranteed interest rate set by your insurer. But you could also consider purchasing a more affordable term life policy, and then investing the money youre saving in things like treasury bonds or index funds.
But hey, were not financial advisors, and were not pretending to be. Its just a good idea to ponder all of this before discussing things with whatever expert you trust with your money.
How Can I Get Term Life Insurance Online
Traditionally, most people bought life insurance through an agent, which usually entailed in-person meetings and/or phone calls. A new breed of companies is offering term life insurance online, however, without going through an agent.
It’d be awkward if we didn’t mention: Fabric is one of them. With Fabric, you can apply for term life insurance online in about 10 minutes, without talking to any salesy agents.
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What Happens To Term Life Insurance At The End Of The Term
Generally speaking, when a term life policy comes to the end of its term you either have to buy another policy or go without life insurance. One exception: If you have a term policy with a guaranteed renewal clause, that will allow you to renew at the end of your term on a year-by-year basis, typically at a far higher rate. While expensive, it can be worthwhile if your health has declined or you are otherwise uninsurable.
Should You Convert Your Term Life To Whole Life Insurance
Most term life insurance policies allow you to convert your term policy into a permanent life insurance policy such as whole life insurance. Is this the right thing to do? Some of the reasons it may be a good idea to convert your term policy to a whole policy include:
- Your term life policy is about to expire and you are in your 50s or 60s.
- You want to extend your life insurance coverage, but term insurance may no longer be available or has become very expensive due to your current age.
- You are setting up an estate, or you are concerned about estate taxes.
- You are setting up a trust in your will.
- You need a non-taxable investment option.
Converting term life to whole life insurance can be an excellent way to continue your life insurance policy and also build cash value that you can borrow from.;
There are many different ways to structure this type of policy, depending on your needs and goals, so be sure to work with a life insurance professional who can answer all of your questions and help you make the best choices.
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