Understand Term Life Insurance

  

Term life insurance is pretty simple—coverage for a specific term of years. To get right down to it, it’s not a policy with a lot of bells and whistles, only supplying a payout to your beneficiary after your demise. Which, is why it’s known as “pure life insurance.” Generally, these policies have durations of 10, 20, and 30 years of coverage.

  

The Pros and Cons

 

Financial gurus Dave Ramsey and Suze Orman preach term life insurance all day long. In fact, in Ramsey’s opinion, anything else is a rip-off.

 Though why the strong opinion Mr. Ramsey? A significant difference between term and whole life insurance is that term has much more affordable premiums. Especially considering the amount of coverage, you get in comparison to the costs of other plans.

 According to Ramsey, the better option is to get term life insurance coverage, then invest the rest. Doing so will ensure that you are “self-insured” by the time the policy ends. That is, of course, you’re disciplined enough to save your money as the guru suggests.

One downside to term life insurance is that the policy doesn’t accumulate any cash value. In other words, it has no investment component. It’s strictly to help safeguard your family’s financial security should they be forced to carry on without you. You can’t tap into it or withdraw from it like you can whole life insurance, for example.

A great way to save even further on this type of insurance is to stagger your policies. Perhaps you get two policies, one 10-year, and one 20-year to cover the most critical phases in your life.  Staggering policies is known as “laddering,” a common bond strategy which has become more popular recently with term life insurance policies.

 

Why It Would Be Right for You

Term insurance is the go-to policy for many people. These policies are easy to understand and are available online as well. If you’re looking for affordable coverage, this is the way to go. Even NerdWallet says so.

Because of the affordable premiums, a significant difference between term and whole life insurance is that term works for people on a budget. Furthermore, if you only need life insurance to replace your income over a specific time frame—such as the years you’re paying a mortgage or raising a family—then this is the right coverage for you.

Another reason this type of life insurance would be a good fit is if you want permanent coverage but can’t afford it at the time. Many term policies convert to permanent coverage if you decide to keep the plan for longer than the original duration.   

As mentioned before, term life insurance doesn’t include an investment component. Often, people are attracted to policies that accumulate cash value—especially if they’re not great at saving their money. 

However, if saving money is your thing then you don’t need a policy which forces you to save. You’ve got this handled. By the end of the term life insurance policy, Dave Ramsey would be giving you a high-five for becoming "self-insured."

  

Understand Whole Life Insurance

  

Known as traditional life insurance, whole life insurance is different from term insurance in that it provides life insurance coverage for the entire duration of your life, or your “whole life”, hence the name. In short, it’s permanent insurance. Available at varying amounts and rates, these types of policies offer more than basic insurance coverage. They include an investment component as well, accumulating a cash value over the life of the plan. Although the cash value accumulates slowly, you won’t pay taxes on its gains (tax-deferred).   

  

The Pros and Cons

 The cash value component is a significant driver for why many people opt for this type of policy. It’s a considerable difference between term and whole life insurance. Most don’t even understand how it works.  

Providing steady growth at a base rate, you’re able to “borrow” money against the account or even surrender the policy for cash. However, doing so reduces your death benefit if you don’t repay with interest. A common misunderstanding is that you will receive the cash value in addition to the entire death benefit. And, that’s not the case. 

On the flip side, the most attractive element about whole life insurance is that it provides lifetime coverage. Plus, the death benefit is guaranteed. Some whole life insurance policies earn dividends, as well. 

Although most financial experts claim that the majority of consumers don’t need lifetime coverage, it can work for many people. The most unattractive part is undeniably the high-dollar premiums—significantly higher than term life insurance policies. 

 

Why It Would Be Right for You

Even though whole life insurance is often tricky to understand, it works well for some people. 

For example, if you’re wealthy and want a steady growth rate for your investment, whole insurance would be right for you. Or, if you're going to provide your heirs with money to pay estate taxes.  Many CPA's and estate planning attorneys recommend using life insurance to fund for those taxes as it's often much less costly than liquidating assets to fulfill the tax obligation. 

Not many people are riding the money train, so if you’re like a lot of folks, you may have a difficult time saving money. After all, there’s always something to spend it on. In this case, a whole life insurance policy could serve you well as an automatic savings plan. You force your money into savings...just under a different account title. 

Also, if you have a child or lifelong dependent—a child with special needs, for example—this type of policy can provide your child with enough assets to fund a special needs trust t provide for their care after you’re gone. 

For business owners who are passing the business down to one child, a whole life insurance policy could compensate any other children you may have. 

 

Take the Next Step 

 

Ensuring your family’s financial security is not something to take lightly. It’s important to know the difference between term and whole life insurance so you can make the best choice for your loved ones.