Guest post: Angie Picardo is a staff writer for NerdWallet, a website dedicated to helping consumers alleviate debt with the best balance transfer cards.
Term vs. Whole Life Insurance: Deciding What’s Right for You
No one wants to think about the potential of being without a spouse or loved one, but it is good to be prepared for the worst. Life insurance is one way to create a safety net for yourself or your family in case of untimely death.
Whole Life Insurance
Whole life insurance is a policy that remains in effect for the policy holder’s entire life. Generally speaking, the policy will remain active as long as the owner continues to pay the policy premiums. Whole life insurance also has an investment component, often by way of bonds or money-market accounts. From an investment perspective, whole life insurance is great because dividends or interest that builds up is tax-deferred. There are lots of types of whole life insurance, and two notable kinds are universal and variable.
- Universal life policies are quite involved because they treat the premium, death benefit and cash value aspects of the policy separately. The most important thing to know is that these are usually the most flexible type of policies.
- Variable life policies may have increasing or decreasing value based on the investments that are part of the policy. It generally has a minimum garunteed death benefit, with variable additional amounts depending on the state of the market.
Term Life Insurance
As the name implies, term life insurance lasts for a period of time, a term. The term can be as short as one year, but is often in periods of 5, 10, 15, or 20 years. Term life insurance can also be a term that lasts until the policy holder reaches a specific age. The premiums of the policy are fixed throughout the term, but may go up when the term expires if you choose to renew. There are several types of term life insurance: two common ones are renewable and convertible term.
- Renewable term insurance allows the owner of the policy to renew when the term ends regardless of his or her health. This is a great benefit because an unexpected deterioration in health could drastically hike up premiums; this keeps the price at a reasonable rate.
- Convertible term policies allow for exchanging the term policy for a permanent plan. There is generally a premium rate on the conversion process that is based on the policy holder’s current age.
Making the Choice
Who Can Get Life Insurance?
There is no perfect age for signing up for life insurance of any variety. You should get a life insurance policy when there are people who depend on your income, such as children or a spouse. Remember that the point of a life insurance policy is to ensure that dependents are taken care of after the death of a family member and it is not some kind of savings plan. If the holder of the policy doesn’t die within a certain time frame (for term life insurance), there is no payout. Furthermore, when discussing whole life insurance, there is no knowing how old the holder will be when he or she dies or if there will be a need for the money at that time (for example, if all of the policy holder’s children are well into adulthood, the mortgage is paid, etc.). Having life insurance is most important for people who are the sole wage-earners in a family, married people, parents (especially single parents), or anyone who takes care of someone else.
While anyone can get life insurance, the cost increases dramatically based on the age, health and habits of the insured. An insurance company might look at the medical history of the individual or his or her family. They may also take into account whether the person has had cancer or smokes tobacco. Age is another factor; younger people tend to have less health issues than older people, so a young person can pay less for a larger policy than an older person can. Additionally, an insurance company might increase premiums for people with hazardous jobs or for those who have dangerous hobbies like rock climbing, sky diving, or Scuba.
Life Insurance Resources
The first thing that you’ll want to figure out when deciding on your life insurance policy is how much you want to be insured for. Consider things like the number of dependents you have and how much their educations might cost, the number of years you’d like to have your family provided for, any existing mortgages, and current retirement savings. If the idea of doing all that math makes your head spin, check out this handy life insurance calculator.
There are a number of sites on the Web dedicated to educating people about life insurance. The LIFE Foundation, which is a nonprofit organization, has many articles and guides for understanding life insurance. For looking at life insurance from a consumer perspective, the state of New York has put together a guide on Life Insurance Information for Consumers. It can help you analyze the costs, select a policy, and more.
Whole Life or Term?
This is one of the hardest questions of choosing life insurance and it depends on your life circumstances. If you intend to have your children through college and your mortgage paid off in the next 15 years, get a 15 or 20 year term policy just to make sure everyone makes it through. If you know you would feel better having a life insurance payout regardless of everyone’s life circumstances, whole life may be better. The important thing is to do your research and pick a plan that makes sense for your life.