Summit Insurance Advisors
Feb 28, 2017
Life insurance helps protect your dependents if you’re no longer around to take care of them. The proceeds can cover your funeral costs, mortgage payments, bills, school tuition, and any other expenses your family may need help with.
There are several different types of life insurance, but they tend to fall in two categories: term life insurance and whole life insurance.
Here is a breakdown of the each type so you can decide which is best for you and your family.
Whole life insurance
Whole life insurance is the better known of the two types. From the 1940s to the 1970s, it was common for people to buy whole life insurance; a policy could cover the family’s income and other expenses.
This type of life insurance is more expensive and complicated than term life insurance but it has several important benefits. For one, it provides lifelong coverage. It also includes an investment component called the policy’s “cash value.” The cash value grows slowly and is tax-deferred, so you won’t pay taxes on its gains while they are accumulating. Policyholders can borrow money against the account or surrender the policy for cash. However, if you don’t repay the loans with interest, your death benefit will be reduced, and if you surrender the policy, you’ll no longer have coverage.
Moreover, with whole life insurance, the premium remains the same for as long as you live, the death benefit is guaranteed, and the rate at which the cash value account grows is also guaranteed.
In terms of cost, whole life insurance is more expensive than term life insurance because it provides lifelong coverage and there is a rate of investment return on the cash value.
Term life insurance
Term life insurance is the easiest to understand and costs less than whole life insurance.
This type of life insurance provides coverage for a specific time period. It’s designed to only protect your dependents if you die prematurely. If you die within the term period, your beneficiaries receive the death benefits. There is no other value (such as cash value) with term life insurance.
Policies have terms between one and 30 years; the most common term is 20 years. The premium usually stays the same throughout the entire term.
When choosing a term life insurance policy, select one which covers the period your family would need it most. The benefits would replace your income and help your family pay for expenses that you help cover now, such as childcare. Ideally, the term would expire around the time your family is no longer financially vulnerable; for example, your kids are out of the house, your home will be (mostly) paid off, and there is a sufficient balance in your savings account.
Term life insurance is relatively inexpensive because it’s temporary and has no cash value.
To sum up, whole life insurance is more expensive than term life insurance because it provides lifelong coverage and has a guaranteed rate of investment return on the cash value. The premium stays the same as long as you live and the death benefit is guaranteed. Term life insurance costs less than whole life insurance because it only provides coverage for a certain time period—anywhere from one to 30 years. It has no cash value.
For Phoenix life insurance and Scottsdale life insurance, visit Summit Insurance Advisors online.
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