What Is Term vs. Whole Life Insurance – Types of Life Insurance

According to data collected by the Insurance Information Institute, about 60% of all Americans were covered by some form of life insurance in 2018. About 20% of Americans believe they don’t have enough coverage and are in the market for more.

All life insurance policies take one of two forms:

  • Term life insurance, which charges fixed premiums and pays a set death benefit to a named life insurance beneficiary or beneficiaries during a fixed term.
  • Permanent life insurance, commonly known as whole life insurance, a more expensive product featuring a savings or investment component that grows in value over time and may offer a variable-premium option to control costs.

Life insurance shoppers keen to choose the right type of life insurance must understand the key differences between term and whole life insurance. This guide can help.

Key Features of Term Life Insurance and Whole Life Insurance

Whole or permanent and term life insurance both share a common purpose: to provide a tax-free windfall upon the death of the policyholder. While ensuring this windfall is effectively the sole purpose of term life insurance, the cash value component makes permanent life insurance a useful pre-death investment vehicle for higher-income policyholders as well.

Policy Premiums

Like all forms of insurance, term and permanent life both require policyholders to pay premiums as a condition of coverage. Failure to pay premiums eventually results in the policy’s cancellation and the attendant loss of any benefits or accumulated cash value.

Both types of life insurance charge fixed premiums by default. For term life policyholders, premiums remain “level” — fixed — for the full term, no matter what. (The proper name for term life insurance is “guaranteed level term life insurance.”)

Some permanent life insurance subtypes, such as variable universal life insurance, allow policyholders to pay lower premiums without interrupting coverage, although the death benefit and cash value may decline.

Even when premiums remain fixed for the full policy term, inflation all but assures they grow cheaper over time in real terms.

Term Life Insurance Premiums

A term policy’s premium remains fixed for the full duration of the initial term: 10 years on a 10-year policy, 20 years on a 20-year term, and so on. The premium is a function of term length, with longer terms generating higher premiums due to the policyholder’s greater likelihood of death while the policy is effective. Premiums on 30-year term policies are higher by a factor of two or more than premiums on 10-year policies of equal size.

Many term policies offer the option to extend coverage for a series of consecutive one-year terms after the initial end of the term. Each one-year term’s premium is higher than the last and extending coverage may well prove prohibitively expensive.

However, medical underwriting is generally not required to extend coverage. For policyholders in ill health, extension — rather than applying for a new policy for which approval is unlikely — may be the only option to continue coverage.

Permanent Life Insurance Premium

A permanent life policy’s premiums also remain fixed, or level, by default for the policy’s full duration: until the policyholder dies or reaches the age of 100, whichever occurs first. The premium doesn’t change due to age or health status, although a lapse in coverage that necessitates a fresh application will likely result in a higher premium once the new policy is issued.

Unlike level term policyholders, permanent life policyholders may have the option to pay reduced premiums. This option is available on variable universal life insurance policies, which allow policyholders to use their accrued cash value to pay part or all of their premiums once the cash value reaches a certain threshold.

Variable universal life policyholders can also front-load premium payments to accrue cash value faster, then use the stored balance to reduce out-of-pocket premiums.


Policy Term

A life insurance policy’s term is the length of time it remains effective — assuming timely, in-full premium payments as stipulated by the insurance contract — without requiring action by the policyholder or additional underwriting by the life insurance company.

Term Life Insurance Policy Terms

Term life insurance coverage through a company like Haven Life is designed to be temporary, albeit relatively long in duration. Initial policy terms, during which the premium remains fixed regardless of health or age, typically range from five to 30 years. Some life insurance companies underwrite policies with initial terms as long as 40 years, but these aren’t as common.

Term life policyholders looking to continue coverage for 30 years or longer without paying the premium demanded by a single 30-year policy can instead create a life insurance ladder using multiple smaller policies that steps down the coverage amount over time.

For a 30-year-old applicant looking to replace $2 million in expected income over the subsequent 30 years, a suitable ladder might include:

  • A 10-year policy with a $500,000 death benefit
  • A 20-year policy with a $1 million death benefit
  • A 30-year policy with a $500,000 death benefit

This ladder ensures $2 million in total coverage during the first 10 years, $1.5 million in coverage during the second decade, and $500,000 in coverage during the final decade. This gradual decline in coverage accounts for the policyholder’s likely accumulation of wealth and the corresponding decrease in remaining lifetime income and expenses.

Permanent Life Insurance Policy Terms

A permanent life insurance policy is designed to provide lifetime coverage. That is, the term usually lasts the entire life of the policyholder and ends with the policyholder’s death. Life insurers generally cancel permanent policies, go ahead and pay the death benefit, and return the cash value if the policyholder reaches the age of 100.


Death Benefit

Both term and permanent life insurance policies guarantee death benefits to the named life insurance beneficiary or beneficiaries.

A policy’s death benefit is generally payable upon the insured party’s death, although a portion may be paid out to terminally ill policyholders as part of an accelerated death benefit rider. When the named beneficiary is an individual, death benefits are not subject to income tax.

Term Life Insurance Death Benefit

A term life death benefit remains fixed for the entire policy term. Absent certain rare extenuating circumstances, such as provable fraud during the application process — like failure to disclose a serious medical condition — or suicide during the first two years of the term, the death benefit is paid to named beneficiaries upon the policyholder’s death.

Permanent Life Insurance Death Benefit

The rules governing permanent life insurance death benefits vary by policy subtype:

  • Whole Life Insurance. The death benefit generally remains fixed for the life of the policy, regardless of the policy’s accrued cash value.
  • Universal Life Insurance. Universal life policyholders offer more flexibility around death benefits. Policyholders generally have two options: a level death benefit that remains fixed until death or an increasing death benefit that combines a level death benefit with the steadily increasing cash value component and pays the combined sum at the policyholder’s death. Loans against cash value or withdrawals of cash value may decrease the death benefit, however.
  • Variable Universal Life Insurance. A variable universal policy’s death benefit can increase or decrease, depending on the performance of the investment instruments underlying the policy’s cash value. The risks and potential rewards are greater for policyholders and beneficiaries alike.

Cash Value (Surrender Value)

Cash value, sometimes known as surrender value, is a key distinction between term and permanent life insurance. Permanent policies build cash value over time; term policies don’t.

Term Life Insurance Cash Value

A term life insurance policy has no cash value component. The death benefit is paid in cash, of course, but there’s no value to borrow against or cash out before the policyholder’s death. If the policyholder outlives the initial term and doesn’t renew, the policy expires worthless.

Life insurance companies do offer optional “return of premium” riders to would-be policyholders. In exchange for a higher fixed premium, return of premium riders guarantee the tax-free return of all premiums paid over the life of the policy to policyholders who outlive the term.

However, policyholders can’t withdraw or borrow against premiums paid before the term expires.

Permanent Life Insurance Cash Value

All permanent life insurance policies have a cash value component that exists separately from — but can sometimes be combined with, depending on policy subtype — the death benefit:

  • Whole Life Insurance. Whole life insurance policies offer guaranteed rates of return that increase the cash value by predictable increments over time. These returns typically come as dividends that can be reinvested in the cash value, delivered to the policyholder as income, or used to reduce premiums.
  • Universal Life Insurance. Universal life insurance policies index the cash value component to an underlying benchmark — such as the S&P 500 — that can gain or lose value. Like whole life, universal life pays dividends that can reduce premiums or supply income.
  • Variable Universal Life Insurance. The cash component of variable life is also invested in market instruments. While the upside is usually higher, so are the management fees, and the dividends and returns can vary as a result.

The cash component’s value remains low during the policy’s early years but steadily builds over time and eventually represents a considerable sum available for withdrawal (surrender) or as collateral for a low-interest loan.

During the policy’s first number of years, usually 10 to 15, surrender fees — fees designed to dissuade early withdrawals — keep the surrender value substantially lower than the full cash value. Eventually, surrender fees no longer apply and the full cash value is available for withdrawal.


Medical Exam Requirements

Most term and permanent life insurance policies require applicants to undergo medical exams as a condition of approval. These exams are thorough but not invasive and typically involve checking the applicant’s vital signs, asking a battery of personal health questions, and running basic metabolic labs.

Term Life Insurance Medical Exam Requirements

Virtually any applicant, regardless of age or health status, can qualify for a term life insurance policy without undergoing a medical exam. The catch is that no-exam policies invariably carry higher premiums and lower maximum death benefits than otherwise identical policies that include medical exams.

For older applicants past retirement age, no-exam coverage is limited to a policy subtype known as “guaranteed issue” — a no-questions-asked product with high premiums and a low coverage limit meant to defray final expenses without much left over.

Permanent Life Insurance Medical Exam Requirements

Most permanent life insurance policies require a medical exam as a condition of coverage, but high-premium, low-value guaranteed issue whole life insurance policies do exist.

These are mainly appropriate for older policyholders looking to defray final expenses while building modest cash value over time. However, because they’re less costly overall, guaranteed issue term policies generally offer better value than guaranteed issue permanent policies.


The Verdict: Should You Choose Term Life Insurance or Whole Life Insurance?

Both term and whole life ask applicants to commit to many years — decades, in most cases — of timely premium payments. Given the time spans and dollar values involved, the stakes for choosing the correct type of insurance are high.

You Should Apply for Term Life Insurance If…

A term life policy is a better fit if:

  • You Want to Minimize Premium Payments. Term life insurance premiums are invariably lower as a share of face value than permanent life insurance premiums. If you aim to minimize premium payments over the life of the policy while maximizing the policy’s death benefit, term life insurance is the clear choice.
  • You Don’t Need Coverage Forever. A finite term is not necessarily a drawback. As you age out of obligations like your mortgage and college tuition for your kids, you’ll also build wealth, assuming you’re saving diligently for retirement. This combination of lower future expenses and higher net worth, along with an inexorable decline in your future expected income as you realize an ever-greater share of your lifetime income potential, will reduce and eventually eliminate your need for life insurance coverage.
  • You Want to Customize a Multipolicy “Ladder” That Steps Down Coverage Over Time. Although certain types of permanent life insurance allow policyholders to customize premiums and death benefits, it’s simpler and cleaner to do so with a multipolicy term life insurance ladder, especially for policyholders who expect not to need as much coverage as they approach retirement.
  • Your Family Won’t Rely on Life Insurance to Supplement Savings or Investments Later in Life. A key advantage of permanent life insurance is the promise of guaranteed cash value in perpetuity. If you expect your family to have adequate liquid savings and investments not to need that backstop after your death, whole life likely isn’t worth the significant added cost.
  • You Want to Skip the Medical Exam. Permanent life insurance policies invariably require medical exams, making term life the de facto choice for applicants who’d prefer to avoid that part of the underwriting process.

You Should Apply for Permanent Life Insurance If…

A whole life policy is a better fit if:

  • You Want Your Policy to Last Indefinitely. If you want the peace of mind that comes with ensuring truly long-term, tax-free financial protection for your survivors and don’t want to roll the dice on another round of underwriting when you’re much older, whole life insurance is the clear choice.
  • You Expect to Borrow Against (Or Cash Out) Your Policy’s Cash Value. If you expect to need a ready source of low-cost leverage later in life instead of or in addition to home equity products, permanent life insurance provides it. Term doesn’t.
  • You Need Help Saving for the Future. Even if it’s not used or thought of as such by many policyholders, permanent life insurance effectively forces policyholders to save a portion of their monthly income for the far future. This is a key selling point for policyholders who worry about their capacity or diligence to save consistently for their later years.
  • Your Income Can Support Higher Premiums. Permanent life insurance is not always the superior choice for higher-income policyholders. Indeed, term life insurance is a better fit for many affluent families that don’t need the tax or cash value benefits of permanent life insurance. But whole life is useful for high earners who consistently max out contributions to other tax-deferred savings vehicles, such as employer-sponsored retirement plans, 529 education savings plans, and IRAs.
  • You Want the Option to Vary Your Premiums Over Time. By definition, level term life insurance premiums remain fixed for the duration of the initial term. That’s not the case with certain subtypes of permanent life insurance. Variable universal life insurance, for example, allows policyholders to pay higher or lower premiums as their needs dictate — salving the sting of higher overall policy costs.

Both Are Great If…

Both term and permanent life insurance are excellent options if…

  • You Need to Shield Your Family From Medium- or Long-Term Expenses Resulting From Your Death. Assuming timely and consistent premium payments, both term and permanent life coverage provide tax-free benefits to policyholders’ survivors, mitigating the financial fallout that would otherwise result from their deaths.
  • You Can’t Afford to Cover Expected Future Expenses From Savings Alone. If you expect your future expenses to exceed the capacity of your survivors’ future income and net worth, either type of life insurance provides a valuable and perhaps critical lifeline to maintaining their living standards and providing for dependents left behind.

Final Word

Most American adults have life insurance coverage. Some prefer the low cost and fixed, finite span of term life insurance through an online insurer like Haven Life. Others happily pay more for peace of mind that lasts a lifetime. All agree that life insurance provides an important layer of financial protection for their loved ones.

It’s an important layer, but not the only one. A term or permanent life insurance policy is necessary but not sufficient to protect against the full range of setbacks that can sidetrack a long-range financial plan — or permanently knock it off course.

Other all-but-essential layers of protection include disability insurance, which helps replace income lost to chronic injury or illness, and health insurance, which helps defray the cost of lifesaving medical interventions — a significant cause of bankruptcy in the United States.

So, by all means, celebrate when you finally cross “get life insurance” off your long-term to-do list. Just don’t assume it’s the last insurance application you’ll need to make.

Source: moneycrashers.com

Indexed Universal Life vs. Whole Life Insurance

Indexed Universal Life vs. Whole Life Insurance – SmartAsset

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Life insurance can provide a measure of financial protection against the worst-case scenario. Whole life insurance and indexed universal life insurance (IUL) are two types of permanent policies you might consider if you’re interested in lifetime coverage. While both policies can offer the opportunity to accumulate cash value while leaving behind a death benefit for your loved ones, they aren’t exactly the same. Understanding the differences between IUL vs. whole life insurance can help you decide which one may be right for you.

A financial advisor can help you sort through all the decisions that go into successful financial planning, not just deciding which type of insurance is appropriate.

Whole Life Insurance, Explained

Whole life insurance is a type of permanent life insurance. When you buy a whole life policy, you’re covered for life as long as your premiums are paid. This is different from term life insurance, which only covers you for a set term, say 20 or 30 years.

With a whole life insurance policy, you have a guaranteed death benefit that’s paid out to your beneficiaries when you pass away. Premiums usually remain level even as you age and the policy accumulates cash value over time.

You can borrow against that cash value if needed or use it to cover the premiums for your policy. Any outstanding loans remaining when you pass away are deducted from the death benefit that’s paid to the policy beneficiaries.

Indexed Universal Life Insurance, Explained

Indexed universal life insurance is also permanent life insurance coverage. Similar to whole life insurance, IUL insurance policies can accumulate cash value over time. You can take out loans against the cash value or leave it in the policy to grow.

The biggest difference between whole life and IUL is how cash value accumulates. With a whole life insurance policy, the cash value is guaranteed by the insurance company. If you’re using life insurance as an investment, that means the rate of return on your policy is fairly predictable.

Indexed universal life, on the other hand, works differently. The rate of return and the rate at which cash value accumulates in the policy is based on the performance of an underlying stock market index. Stock market indexes track a particular sector or segment of the market. So, for example, your IUL policy may track the movements of the S&P 500 Composite Price Index or the Nasdaq.

While the return potential for an indexed universal life policy can be higher than whole life insurance, returns aren’t unlimited. Insurance companies can impose a cap rate or ceiling on your returns each year. For instance, your policy might have a cap rate of 3% or 4% annually. The insurance company may also offer a minimum guaranteed rate of return.

IUL vs. Whole Life: Which One Is Better?

Indexed universal life insurance and whole life insurance can both help you accumulate cash value while retaining a death benefit. But one may suit you better than another, depending on your financial needs and goals. This is where it helps to understand what each one is designed to do. For instance, you might choose a whole life insurance policy if:

  • You’re interested in guaranteed, stable returns year over year
  • You want reassurance that premium costs won’t increase over time
  • You want a guaranteed death benefit with the option to borrow cash from the policy if needed

Whole life insurance is more expensive than term life insurance, but it can be less expensive than indexed universal life insurance. Guaranteed returns also make it the less risky option of the two, which may appeal to you if you’re looking for a more conservative addition to your financial plan.

On the other hand, there are some benefits to choosing an IUL policy over whole life. For example, you may consider an indexed universal life policy if:

  • You’re interested in earning higher returns
  • You need or want flexible premiums
  • You’re looking for a way to supplement retirement income

Indexed universal life insurance carries more risk since your returns hinge on how well the policy’s underlying index performs. It’s possible that you could even lose money but those losses may be limited if your insurance company offers a guaranteed minimum rate of return.

You also have more leeway with IUL insurance premiums compared to whole life insurance premiums. For example, you may be able to adjust your premium amount or temporarily suspend making premium payments and allow them to be covered by the policy’s cash value.

With both types of policies, the cash value can grow on a tax-deferred basis. You wouldn’t owe capital gains tax on earnings unless you were to surrender the policy. And any death benefits passed on to your policy beneficiaries would be tax-free.

How to Choose a Life Insurance Policy

Life insurance is something most people need to have and there are several questions to consider when choosing a policy. Specifically, ask yourself:

  • How long you need coverage to remain in place
  • What amount of coverage is appropriate for your financial situation
  • How much you’re comfortable paying toward premium costs
  • Whether you’re interested in accruing cash value
  • What degree of risk you’re comfortable taking

These questions can help you determine whether term life or a permanent life insurance policy is the better fit. And if you opt for permanent life insurance, they can also help you decide between IUL vs. whole life insurance.

Don’t forget that there’s also a third permanent life insurance option available: variable universal life insurance. With variable universal life insurance, you’re investing the cash value portion of the policy directly into mutual funds or other securities, rather than tracking a stock market index. This type of policy can offer the highest return potential but it can also carry the most risk.

Talking to an insurance agent or broker can help you decide whether IUL vs. whole life insurance or another type of life insurance, makes the most sense. You may also want to talk to your financial advisor about how to use life insurance effectively when crafting your estate plan.

The Bottom Line

Indexed universal life insurance essentially combines an investment tool with a life insurance policy. You might find that attractive if you’ve exhausted your 401(k) contributions or IRA contributions for the year but still have money to invest. On the other hand, you might lean toward whole life insurance if you want a guaranteed death benefit with lifetime coverage.

Tips for Estate Planning

  • Using an online life insurance calculator can help you determine how much life insurance you need. Generally, financial experts often recommend having anywhere from 10 to 15 times your annual income in coverage but the specifics of your situation may dictate having a larger or smaller death benefit.
  • Talk with your financial advisor about the best type of life insurance for your needs and how much coverage to get. If you don’t have a financial advisor yet, finding doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If you’re ready, get started now.

Photo credit: ©iStock.com/AleksandarGeorgiev, ©iStock.com/PeopleImages, ©iStock.com/designer491

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Why Everyone Over 30 Should Start Thinking About Life Insurance

I don’t like to make generalizations too often, but I do feel that everyone over 30 should start thinking about the importance of life insurance. That is, if you’re 30 and over and don’t have any life insurance.

No one likes to think about their demise, but life insurance is an extraordinary product that can be used to reduce the financial burden you could leave behind for loved ones. Plus, different types of life insurance can even help you build wealth and diversify your assets.

Here are 4 important reasons why everyone over 30 should start thinking about life insurance.

The Insurance At Your Job is Probably Not Cutting It

By now you probably realize the life insurance coverage that your job offers is not enough. Some employers include life insurance in their list of benefits which is great, but the coverage amount often doesn’t come close to your insurable need.

Your insurable need represents how much life insurance you should hold depending on factors like your age, liabilities, health conditions, and so on. One common rule of thumb is that your average life insurance coverage amount should be 7 to 10 times your annual income.

So if you’re earning $60,000 per year, you might want to consider a policy of $420,000 to $600,000 depending on your needs. However, the average employee life insurance policy amount is only around $25,000 to $50,000 or one years’ salary. This is not nearly enough.

Plus, when you leave your job, you’ll lose your insurance benefits too. This is why it’s always important to consider having your own life insurance coverage independent of your employer. So many people are switching jobs every 2 to 3 years so you may not want your life insurance benefits to be tied to your employer anyway.

Term life insurance is pretty affordable and you can get a free quote in just a few minutes from Bestow.

Here are 4 important reasons why everyone over 30 should start thinking about life insurance. Click To Tweet

You Want to Protect Loved Ones From a Financial Burden

You don’t have to be married with kids and a house to want to consider life insurance. However, more people in their 30s do focus on settling down and working toward some of these milestones.

If you do have kids, a mortgage, etc. you’ll definitely want to consider how your partner would get by if anything did happen to you. Would the kids still be able to go to college? Would your spouse be able to keep the house? These are important questions that life insurance can help you answer.

Even if you’re single and at the height of your career. More people in their 30s are carrying debt like student loans and personal loans. Did you know that some types of student loan debt can not be forgiven even if you died? You probably don’t want to pass on any financial burdens to your parents or other loved ones who would have to fit the bill.

Life insurance provides a tax-free payment to your beneficiary which can help cover everything from debt payments, loss of household income, funeral arrangements, and more.

RELATED: How Much Life Insurance Do You Really Need

30 Is Still Young Enough to Lock in Affordable Rates For Whole Life Insurance

Let’s say you’re considering the importance of life insurance. Whole life insurance in particular. Whole life insurance is permanent insurance that builds cash value as you continue to pay your premiums.

Other types of insurance, like variable whole life, even allow you to invest some of the cash value and grow the amount faster. You can borrow from your cash value, use it to pay your life insurance premiums, or even withdraw it while you’re still alive and well.

While whole life insurance is cheaper than term life, costs increase around the board as you get older. If you’re considering whole life insurance, the best option is to get a policy while you’re younger. Thirty years old is not too old to still get a decent rate for your life insurance premiums. Plus, it allows you enough time to build cash value that could be put to use in the future.

Get Insured and Protected From Medical Issues

Yes, life insurance is geared toward providing financial relief for your loved ones. Depending on your policy, you may be able to obtain something called ‘living benefits’. Living benefits are an insurance rider (which means it’s an added on feature) that can be added to your term or whole life insurance policy.

Living benefits can allow you to use some of your life insurance coverage amount to pay medical expenses for a serious illness or condition. Of course, this will reduce the benefit provided to your beneficiary, but it can still be a helpful feature to help you cover medical bills that could otherwise be left for your loved ones to deal with anyway.

No one likes to think about getting sick or becoming terminally ill, but planning for the best and worst is just a part of adult life. As you get older, your health tends to decline but if you’re still healthy in your 30s, it’s the perfect time to lock in a life insurance policy and consider adding a living benefits rider.

RELATED: Should You Get Disability Insurance? 4 Ways to Decide

Summary

Life insurance should be apart of everyone’s financial plan. Knowing the importance of life insurance can be life-saving information. If you’re over 30 and still don’t have coverage. Consider all the reasons to get a term or whole life policy. Consider your current future needs and carefully weigh the pros and cons.

Remember, you can get a free no-obligation quote from Bestow in just two minutes.

Source: everythingfinanceblog.com

Whole Life Insurance Is a Complete Rip-Off! (Hour 1)

Insurance, Retirement, Debt, Home Buying

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The 5 Things Single Parents Need to Consider about Life Insurance

August 28, 2017 &• 5 min read by Abby Hayes Comments 0 Comments

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As a parent, one of the scariest things to think about is what your children will do if something happens to you someday. This can be even scarier if you’re a single parent without a partner to fall back on.

But here’s the thing: you are the sole provider for your children. It’s even more important that you take time to consider all the future possibilities. Here’s what you need to know about life insurance, including how much coverage to get and how much it’s likely to cost.

How Much Coverage Do You Need?

The biggest life insurance question is usually about how much coverage you need. There are all sorts of rules of thumb for this issue. Some say you need seven times your current annual income, while others say more or less.

But how much coverage you need really depends on how the benefit would need to be used if you were to pass away. Ultimately, this depends on a few factors, including the following:

  • How old your children are right now
  • Who would care for them if you were to pass away
  • What that caregiver would need to be able to care for your children
  • How much debt you currently have
  • Whether or not you want to pay for your children’s college costs

Let’s break this down, then, into the five things you’ll need to consider to get the most out of your life insurance policy.

1. Talk to Potential Caregivers

If you don’t already have plans for alternative caregivers for your children, now is the time to make them. Your life insurance decisions will largely hinge on the circumstances of those who would care for your children in the event of your death.

For instance, let’s say you have four kids who would live with your parents if you passed away. If your parents have already downsized into a retirement home, they’d probably need to move to care for your children. In this case, you need to account for their additional moving and housing expenses in your life insurance policy. If they’ve already retired, you may need to consider the other ways that caring for your children would impact their ability to cover their own living expenses.

But what if you have only one child who would move in with family friends if you passed away? If your friends already have a few kids of their own, they may not need to move or add on to their home to accommodate your child. In this case, you may not need quite as much life insurance coverage.

It’s a good idea to have an up-front conversation with potential caregivers. What would they need in order to care for your children appropriately? These are difficult conversations to have, but they’re an essential part of this equation.

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2. Think about Your Kids’ Needs

How much insurance you require also depends on your kids’ ages and needs. If you have younger children, you’ll need more coverage—and you’ll need it to last longer. If your kids are older, though, you can probably purchase a shorter policy with less coverage.

Beyond just their ages, you’ll want to consider your kids’ particular needs as well. Are they currently attending a private school that you’d want them to continue attending? Or maybe you have a child with special medical needs. Make sure your policy is large enough to cover those costs.

If you want to fund your children’s college attendance with your death benefit, you’ll need quite a bit more coverage. If you can’t afford to cover college tuition right now, you could also look at college funds as the icing on the cake. In a couple of years, if you’re in a better place, consider upping your policy or adding a second one to cover these costs.

3. Consider Your Current Financial Situation

Even those without children should have enough life insurance coverage to tackle leftover debts and other end-of-life expenses, but it can be even more important for single parents. You’ll want to be sure your children aren’t dealing with a burden of debt while also grieving your loss. If possible, you’ll want to cover the full amount of your debt so they don’t need to.

Keep in mind the costs of end-of-life services, like a funeral service and burial, as well. These can run as much as $10,000 and be a real financial burden if you forget to plan for them yourself.

4. Add It All Up, and See What You Need

Now it’s time to determine how much total life insurance coverage you need. Here’s an example, based on the recommendation that you cover seven times your annual salary.

Sherry is a single mom of a four-year-old and a ten-year-old. She makes about $40,000 per year. If she passed away, her parents would care for the kids, and they’d need to move into a larger home to do so. She has about $25,000 in debt, outside of her mortgage, and she would want to fund both kids’ college funds with her life insurance. Here’s where she stands:

  • Income Replacement: $280,000
  • Additional Housing Costs: $50,000
  • Debt: $25,000
  • End of Life Expenses: $10,000
  • College Funds: $200,000
  • Total Life Insurance Needs: $565,000

That sounds like a lot, right? Before you decide you can’t afford insurance, though, take the next step.

5. Check Out Term Life Insurance Coverage

Over half a million dollars in life insurance coverage seems like a lot, but many people actually overestimate the actual costs of such insurance, especially for healthy, relatively young individuals.

The key is to get term insurance (unless you have a good reason to have more expensive whole life insurance coverage) for only as long as you need it. The longer your term, the more expensive your coverage. Sherry should probably have a 15-year policy, which would cover her until her children are both adults. And if Sherry is in good health, a policy like this could cost well under $50 per month. That’s much better, right?

Once you know how much coverage you need, it’s time to shop around. Plenty of online quoting systems can get you an estimate on your costs in just a few minutes.

These steps aren’t fun to think about. But having an affordable life insurance policy you know will protect your loved ones is worth a bit of discomfort. Check out our Personal Finance Learning Center to ensure you’re on the right track to keep your children safe and secure when you’re no longer here.

Image: Juanmonino

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Term Life vs. Whole Life Insurance: Which Is Best for You?

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Advertiser Disclosure

Disclaimer

Taking out a life insurance policy is a great
way to protect your family’s financial future. A policy can also be a useful
financial planning tool. But life insurance is a notoriously tricky subject to
tackle.

One of the hardest challenges is deciding
whether term life or whole life insurance is a better fit for you.

Not sure what separates term life from whole
life in the first place? You’re not alone. Insurance industry jargon can be
thick, but we’re here to clear up the picture and make sure you have all the
information you need to make the best decision for you and your family.

Life Insurance = Financial
Protection for Your Family

Families have all sorts of expenses: mortgage payments, utility bills, school tuition, credit card payments and car loan payments, to name a few. If something were to happen and your household unexpectedly lost your income or your spouse’s income, your surviving family might have a difficult time meeting those costs. Funeral expenses and other final arrangements could further stress your family’s financial stability.

That’s where life insurance comes in. Essentially, a policy acts as a financial safety net for your family by providing a death benefit. Most forms of natural death are covered by life insurance, but many exceptions exist, so be sure to do your research. Death attributable to suicide, motor accidents while intoxicated and high-risk activity are often explicitly not covered by term or whole life policies.

If you die while covered by your life
insurance policy, your family receives a payout, either a lump sum or in
installments. This is money that’s often tax-free and can be used to meet
things like funeral costs, financial obligations and other personal expenses.
You get coverage in exchange for paying a monthly premium, which is often
decided by your age, health status and the amount of coverage you purchase.

Don’t
know how much to buy? A good rule of thumb is to multiply your yearly income by
10-15, and that’s the number you should target. Companies may have different
minimum and maximum amounts of coverage, but you can generally find a
customized policy that meets your coverage needs.

In addition to the base death benefit, you can enhance your coverage through optional riders. These are additions or modifications that can be made to your policy—whether term or whole life—often for a fee. Riders can do things like:

  • Add coverage for disability or deaths not commonly
    covered in base policies, like those due to public transportation accidents.
  • Waive future premiums if you cannot earn an income.
  • Accelerate your death benefit to pay for medical bills
    your family incurs while you’re still alive.

Other
riders may offer access to membership perks. For a fee, you might be able to
get discounts on goods and services, such as financial planning or health and
wellness clubs.

One
final note before we get into the differences between term and life: We’re just
covering individual insurance here. Group insurance is another avenue for
getting life insurance, wherein one policy covers a group of people. But that’s
a complex story for a different day.

Term Life Policies Are Flexible

The “term” in “term life” refers to
the period of time during which your life insurance policy is active. Often,
term life policies are available for 10, 20, 25 or 30 years. If you die during
the term covered, your family will be paid a death benefit and not be charged any future
premiums, as your policy is no longer active. So, if you were to die in year 10
of a 30-year policy, your family would not be on the hook for paying for the
other 20 years.

Typically, your insurance cannot be canceled
as long as you pay your premium. Of course, if you don’t make payments, your coverage will lapse, which typically
will end your policy. If you want to exit a policy you can cancel during an
introductory period. Generally speaking, nonpayment of premiums will not affect your credit score, as
your insurance provider is not a creditor. Given that, making payments on your
life policy won’t raise your credit score either.

The major downside of term life is that your
coverage ceases once the term expires. Ultimately, once your term expires, you need to reassess
your options for renewing, buying new coverage or upgrading. If you were to die
a month after your term expires, and you haven’t taken out a new policy, your
family won’t be covered. That’s why some people opt for another term policy to
cover changing needs. Others may choose to convert their term life into a
permanent life policy or go without coverage because the same financial
obligations—e.g., mortgage payments and college costs—no longer exist. This
might be the case in your retirement.

The Pros and Cons of Term Life

Even though term life insurance lasts for a
predetermined length of time, there are still advantages to taking out such a
policy:

  • Comparably lower cost: Term life is usually the more affordable type of life insurance, making it the easiest way to get budget-friendly protection for your family. A woman who’s 34 years old can buy $1 million in coverage through a 10-year term life policy for less than $50 a month, according to U.S. News and World Report. A man who’s 42 can purchase $1 million in coverage through a 30-year term for just over $126 a month.
  • Good choice for mid-term financial planning: Lots of families take out a term life policy to coincide with major financial responsibilities or until their children are financially independent. For example, if you have 20 years left on your mortgage, a term policy of the same length could provide extra financial protection for your family.
  • Upgrade if you want to: If you take out a term life policy, you’ll likely also get the option to convert to a permanent form of life insurance once the term ends if your needs change. Just remember to weigh your options, as your rates will increase the older you get. Buying another term life policy at 50 years old may not represent the same value as a whole life policy at 30.

There are some drawbacks to term life:

  • Coverage is temporary: The biggest downside to
    term life insurance is that policies are active for only so long. That means
    your family won’t be covered if something unexpected happens after your insurance
    expires.
  • Rising premiums: Premiums for term life
    policies are often fixed, meaning they stay constant over the duration of the
    policy. However, some
    policies may be structured in a way that seems less costly upfront but feature
    steadily increasing premiums as your term progresses.

Young Families Often Opt for Term Life

The rate you pay for term life insurance is
largely determined by your age and health. Factors outside your control may influence the rates you
see, like demand for life insurance. During a pandemic, you might be paying
more if you take a policy out amid an outbreak.

Most consumers seeking term life fall into
younger and healthier demographics, making term life rates among the most
affordable. This is because
such populations present less risk than a 70-year-old with multiple chronic
conditions. In the end, your rate depends on individual factors. So if
you’re looking for affordable protection for your family, term life might be
the best choice for you.

Term life is also a great option if you want a
policy that:

  • Grants you some flexibility for
    future planning, as you’re
    not locked into a lifetime policy.
  • Can replace your or your spouse’s
    income on a temporary basis.
  • Will cover your children until
    they are financially stable on their own.
  • Is active for the same length as
    certain financial responsibilities—e.g., a car loan or remaining years on a
    mortgage.

Whole Life Insurance Offers
Lifetime Coverage

Like with term life policies, whole life
policies award a death benefit when you pass. This benefit is decided by the
amount of coverage you purchase, but you can also add riders that accelerate
your benefit or expand coverage for covered types of death.

The biggest difference between term life and
whole life insurance is that the latter is a type of permanent life insurance.
Your policy has no expiration date. That means you and your family benefit from
a lifetime of protection without having to worry about an unexpected event
occurring after your term has ended.

The Pros and Cons of Whole Life

As if a lifetime of coverage wasn’t enough of
advantage, whole life insurance can also be a highly useful financial planning
tool:

  • Cash value: When you make a premium payment on
    your whole life policy, a portion of that goes toward an account that builds
    cash up over time. Your
    family gets this amount in addition to the death benefit when their claim is
    approved, or you can access it while living. You pay taxes only when the money
    is withdrawn, allowing for tax-deferred growth of cash value. You can
    often access it at any time, invest it, or take a loan out against it. However, be aware that anything
    you take out and don’t repay will eventually be subtracted from what your
    family receives in the end.
  • Dividend payments: Many life insurance
    companies offer whole life policyholders the opportunity to accrue dividends
    through a whole life policy. This works much like how stocks make dividend
    payments to shareholders from corporate profits. The amount you see through a dividend payment is
    determined by company earnings and your provider’s target payout ratio—which is
    the percentage of earnings paid to policyholders. Some life insurance
    companies will make an annual dividend payment to whole life policyholders that
    adds to their cash value.

Some potential downsides to consider include:

  • Higher cost: Whole life is more expensive than
    term life, largely because of the lifetime of coverage. This means monthly
    premiums that might not fit every household budget.
  • Interest rates on cash value loans: If you need emergency extra
    money, a cash value loan may be more appealing than a standard bank loan, as
    you don’t have to go through the typical application process. You can also get
    lower interest rates on cash value loans than you would with private loans or
    credit cards. Plus, you don’t have to pay the balance back, as you’re basically
    borrowing from your own stash. But if you don’t pay the loan back, it will be
    money lost to your family.

Whole Life Is Great for Estate Planning

Who stands to benefit most from a whole life
policy?

  • Young adults and families who can
    net big savings by buying a whole life policy earlier.
  • Older families looking to lock in
    coverage for life.
  • Those who want to use their policy
    as a tool for savings or estate planning.

To that last point, whole life policies are particularly advantageous in overall financial and estate planning compared to term life. Cash value is the biggest and clearest benefit, as it can allow you to build savings to access at any time and with little red tape.

Also,
you can gift a whole life policy to a grandchild, niece or nephew to help
provide for them. This works by you opening the policy and paying premiums for
a set number of years—like until the child turns 18. Upon that time, ownership
of the policy is transferred to them and they can access the cash value that’s
been built up over time.

If you’re looking for another low-touch way to leave a legacy, consider opening a high-yield savings account that doesn’t come with monthly premium payments, or a normal investment account.

What to Do Before You Buy a
Policy

Make sure you take the right steps to finding
the best policy for you. That means:

  • Researching different life insurance companies and their policies, cost and riders. (You can start by reading our review of Bestow.)
  • Balancing your current and long-term needs to best protect your family.
  • Buying the right amount of coverage.

If you’re interested in taking next steps, talk to your financial advisor about your specific financial situation and personal needs.

Infographic explaining the difference between term and whole life insurance policies.


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Source: credit.com