Epic Battle: Term Life Insurance Vs. Whole Life Policies

by Admin on November 9, 2012

There is a battle that has been waging in the life insurance industry for decades. Some agents will tout whole-life policies and others will tell you that term is the only way to go. If you are looking into getting a life insurance policy or you are considering converting your policy from whole to term or from term to whole, you’ll want to understand the basic differences. (For more information, check out this page.)

Whole Life Insurance: Whole life policies are exactly that: they provide coverage for the entire life of the insured. Many people who choose to use whole life policies do so as an investment. This is actually faulty logic. And here’s why:

When you purchase a whole-life policy you are going to pay more per month because so long as the premium is paid, it’s guaranteed until the insured reaches 99.5 years old. At that point the policy matures. Part of the premium is set aside into an “investment” account, earning a certain percentage based on the market.

The problem with using whole life as an investment is that it matures. This means that when the insured reaches 99.5 you get the money in the investment account, which should be equal to the face value of the life insurance policy. You do not get both the investment money and the insurance coverage.

If the person dies before they are 99.5 you get either the investment money or the policy. Not both. The other thing to consider is that while you can take money out of your investment you have to pay interest on it if you do. You cannot even access your own cash without paying fee.

Term Policies: Term policies are in effect for a certain time period, usually between 10 and 30 years. When that term ends the coverage stops.

Term policies are generally much cheaper. The reason a lot of people choose term policies is because they save so much money. The money you save per month by converting to a term policy could easily be invested in a money market account to accumulate interest at a much higher rate.

The argument behind term policies is that if you invest correctly you won’t need the whole life policy because by the time you reach the age that the policy expires at you should have enough in savings and investments to cover any unexpected costs.

Term policies do not have an investment side as whole life policies, but you can use the money you save to invest in a well-established market.

Before you choose a policy do your homework. While a whole life policy may sound fancy and smart it’s not always your best option. This is particularly true if you are in debt. The extra savings with a term policy could enable you to pay off your debts and begin investing elsewhere much quicker. (This page has more details. Just click the link to find more.)

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