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Life insurance is one of those things you never want to think about when you are young, vibrant, and full of life. There are certain times in life, though, when it becomes necessary to consider carefully what having (or not having) life insurance will mean to the people you love if you were taken away from them suddenly.
Now that you have made the decision to buy life insurance, you have a few important decisions to make, including the type of life insurance to purchase.
Term Life Insurance
Much like the name implies, term life insurance provides coverage for a specified period. Some policies are for a term of five or ten years. Others go on for as long as 30 years. The average policy is for a term of 20 years. If you pass away within the 20-year term of that active policy (meaning that you have not allowed the policy to lapse), then your family, or designated recipients, will receive the full value of the policy.
There are many benefits to a term life policy worth considering. First, your premiums will never increase during your term. This means you can engage in long-term planning for the years when you are raising your children, paying a mortgage, or have greater financial responsibilities and obligations to consider.
The other benefit is that term life policies are cheaper than whole life policies – at least when you are young and in relatively good health. That is also often the time when you are just starting a family, building a career, or when you buy your first home and assume a mortgage.
The drawback to a term life policy is that it only has value to you during the time in which you are paying for it. Once your term ends, the policy has no value at all. Additionally, if you decide you need to extend the coverage term, say you have a baby later in life or buy a newer home and have a longer than expected mortgage, it will cost much more for the additional term than you paid for your original term. Those rates are not locked in for life.
Whole Life Insurance
This type of coverage is sometimes called permanent life insurance. It is much different from a term life policy in the fact that it has both investment and insurance components. However, that is not the only difference. These are a few of the ways whole life policies differ from term life insurance.
You lock in the rates when you purchase a policy. The younger you are, the better your health, the lower your insurance rates. From the moment you take out your policy, your rates are locked in for the life of your policy. This means that you will receive the same low rates for as long as you continue paying for your policy and do not allow it to lapse.
In addition to locking in lower rates for life, a whole life policy builds cash value over the years. This makes your whole life policy both an investment and insurance policy. While the initial premiums are often greater than a term life policy, locking in the rates for life is a game changer when it comes to long-term costs and financial planning.
Choosing Between the Two
Each type of policy offers its set of strengths and weaknesses. A whole life policy, locked in early, ensures that you will always have affordable life insurance coverage. However, term life policies allow you extra life insurance protection that is affordable at times when you need it most.
Some people choose to have both. One for permanent whole life coverage and the term policy for a little additional security for their families during certain critical years. If you are unsure about which policy is best for you, consider consulting with an independent insurance agent or financial planner to discuss your options.
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