Alright, now that I've shared a bit about life insurance, I'd just like to share a little bit about what some people have been asking me - it's about the differences between Whole Life and Term Life policies.
It's an important question for those that are in the market for cover on death and disability so I thought i'd just compile just one or 2 responses that I felt sums it up pretty well, to help you get a basic idea:
When shopping for life insurance, you face the same decision you must make when you're in the market for a new car: lease or buy? Those aren't the words used for insurance, of course, but the concepts of term and permanent life insurance are similar to leasing and buying.
Term insurance is like leasing a car. You purchase death benefits for a specified period --usually 5, 10 or 20 years. When the period is over, it's like turning in the leased car. The deal is done and you walk away.
Permanent insurance, on the other hand, is like buying the car you plan to drive forever. Permanent insurance stays in force as long as you live. It will pay a death benefit, and it accumulates a cash value, too.
The two kinds of life insurance are appropriate for different situations. Term insurance is designed for those who are interested solely in a death benefit; for example, a young father who wants insurance so that his child will be able to afford college if Dad is not around to pay the bills. There is no cash value to this kind of insurance, so often the premiums are lower than they are for permanent insurance. But as the insured gets older, the premiums increase.
Permanent insurance combines a death benefit with a cash value, or savings component, which grows tax-deferred. Many policyholders borrow from the cash value to pay for things such as a college education, or convert their cash value into a retirement fund.
As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, because more money has been paid in and the cash value has earned interest, dividends or both.
The debate is all about that cash value. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.
However, the premiums for permanent life stay the same over the years, while the premiums for term life increase. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. (If you die, the proceeds are usually tax-free to your beneficiary.)
The saying you always hear is, "Buy term and invest the difference." The fact is, it depends on how long you keep your policy. If you keep the permanent life policy long enough (and the market ever fully rebounds), that's the best deal. But "long enough" varies, depending on your age, health, insurance company, the types of policies chosen, interest and dividend rates, and more. The reality is that there is not a simple answer, because life insurance is not a simple product.
My personal take on it? A mixture is always a good way to go in order to have a pretty balanced coverage amount against premium payments.
Provided you have a budget, it's obviously better to put your money into something that could possibly give you returns at the end of the day, but sometimes, the coverage is more important than the potential growth of your money depending on whether there are people counting on you for any reason at all.
Insurance after all is meant to provide you a safeguard for any situation where there's an opportunity cost in any event of loss of a person's life or income or even ability to carry out daily activities.
In short:
- Term provides high coverage at a low price but doesn't have any solid value at the end of the day.
- Whole Life provides a form of savings and guard against inflation. It can be thought of as a vehicle to put money away for a rainy day.
Most importantly, consider carefully what your objective is, and whichever way you intend to go, remember again, that it's best to be covered a little, than not at all.
Be protected everyone!
Jessica
