Which Type of Life Insurance is Better for Me- Term or Whole Life?
It’s not that one type of life insurance is better than another. It comes down to understanding which type of life insurance best fits your needs.
Term life insurance:
Term life insurance is a temporary form of life insurance where you choose to have the life insurance coverage for a defined period of time. Examples are 10, 15, 20 and 30 years. I generally recommend term life insurance when a person has significant responsibilities, both personally and financially. Term life insurance is generally the type of life insurance where you can obtain large dollar amounts of coverage for an inexpensive price. The best way to determine this is to do a needs assessment.
The following are the types of questions that if you answer yes to these you should consider term life insurance.
- Do I have young children or anyone financially dependent on me?
- Do I have a mortgage on a home?
- What is my annual income?
- If I am suddenly deceased how many years would I want to replace my income?
- If I have a spouse or domestic partner do they have an income?
- Do I have any outstanding debts or loans, such a car loan, that I would be worried about someone having to pay if I were suddenly deceased?
Now, let’s add up some hypothetical figures to show an estimate of the amount of term life insurance a person should consider based on the questions above.
- Two children ages 2 and 4. Think about future college and education costs and estimate $200,000 ($100,00 for each child)
- Mortgage = $200,000
- My income = $50,000
- Times 5 years to replace my income = $250,000
- The partner takes care of the children full time
- I have a 2 car loans for $15,000 each
Add the $200,000 for the children, plus the $200,000 mortgage, plus the $250,000 to replace income for 5 years and the $30,000 for 2 car loans. The grand total would be $680,000.This is the amount, based on this example, that a person should at least consider having coverage for.
At the end of the day the cost of your life insurance has to be affordable. Again, these are the types of situations and questions you want to think about if you answer Yes to the questions above.
Whole Life Insurance:
Whole life insurance is a permanent form of life insurance. This means that as long as you pay for the life insurance coverage it stays with you for life. The coverage amounts start much lower than term life insurance. Usually coverage amounts begin at $10,000. However, there are some companies that offer coverage amounts lower than $10,000. While there are many different reasons to have a life insurance policy the main reason I hear from customers, when they are interested in whole life insurance, is for funeral and burial expenses. Primarily the customer does not want immediate family members, relatives or friends to have to reach into their own pocket to help pay for a person’s funeral expenses and whatever other debts may be left unpaid.
Whole life insurance also builds what is known as cash value over time. What this means is that in most cases starting in the second year of the policy there is a small dollar amount of cash value within the policy. With each year that goes by this cash value amount will grow. At any time when there is cash value accumulated you could take a loan against the money that has accumulated for any reason. It’s just like any regular loan. If you do not pay a loan back the amount you borrow would be deducted from the amount that is paid out to a beneficiary upon a person passing away. Keep in mind; depending on the amount of whole life insurance you have, it can take quite some time for cash value to grow. Sometimes people may focus on the borrowing aspect of whole life insurance.
Many of us have a lifestyle we are used to. We have homes, cars, children, debt and loans. What if a family member or members who provide the income suddenly pass away? What does the surviving spouse or partner do? Where does the money come from to pay for food, mortgage, bills, school, clothing, and vehicles? Always keep in mind the true purpose of the whole life insurance, and any life insurance for that matter, is to provide money for your beneficiaries at the time of you passing away.
About the author: Dan Cody has been in the life insurance business for over 7 years. He loves playing a variety of instruments including the guitar, bass, drums, and piano. He also supports cancer research foundations and volunteers at local pet shelters. Dan enjoys helping customers understand life insurance, so they can find a solid policy that fits their needs. You can reach Dan at 1-800-651-1953 or DCody@Pivot.com.