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Term vs Whole Life Insurance – Explained For Beginners

by Admin on January 23, 2012


nsurance is an important part of modern life. It can mean the difference between financial disaster and picking oneself up after a would-be catastrophe and moving on. In the old days, a flood, fire or break-in could ruin a business owner. Years of accumulating tools, merchandise and a building could be destroyed in minutes in a fire. Without insurance, those years would have been irretrievably lost. With insufficient time to make that business back, the owner would have to move on to something else or be faced with poverty.

Today, insurance means that a disaster, while traumatic, does not have to be catastrophic. If covered properly, a policy holder will pay a deductible, but the insurance company will pay to replace or repair whatever was lost. The deductible might be very high (such as $30 million in the case of big ticket items such as a cruise ship), but will be less than the full cost of replacing whatever was lost out of pocket.

There are several types of insurance, all tailored to the specific needs of different situations. One type of insurance is life insurance. Life insurance is generally purchased either as term insurance or whole life insurance. As with any type of insurance, whole life insurance is most costly when it covers the most. The purpose of whole life insurance is to provide for your dependents in the tragic event that you do not survive long enough to do this for them yourself.

Whole life insurance also known as permanent life insurance is the most cost effective solution if one steps back and takes the long view at what will deliver the most return versus dollar spent. A permanent policy is essentially a savings account – money that is put in is compounded and returned later. This would seem like the ideal situation but for a few drawbacks. One is that a permanent policy requires much higher premiums than term insurance. Although the money is returned later, it is returned when it is needed less than when the money was put into the account. Furthermore, a whole-life or permanent plan is often simply a savings plan disguised as an insurance policy. Indeed, there is significant overlap between the two (both involve putting money away for when it is needed later). However, compared to standard mutual funds, insurance policies do not often have competitive rates.

Term life insurance does not necessarily look the best from a big picture perspective. Money goes in, and you might never get it back, especially if you live well into your 90s. However, the premiums are much lower, because of this. Term life insurance does not try to be like a savings plan – it simply ensures that your premature death would not ruin your dependents. Term life insurance is more similar to a car insurance policy – it’s there if you need it, but if an accident never happens, the money is gone.

For more information about insurance, see Insurance Info Desk, a Phoenix insurance organization dedicated to locating and coordinating Scottsdale insurance companies and people with insurance needs.

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