Every family should consider life insurance as a part of their estate planning. There are two types of life insurance that recommended for this purpose, and that is term and whole life insurance. Both policies are explained below.
What is Term Life Insurance?
Term life insurance is considered as the original form of life insurance. Term life offers protection for a specified “term” (5, 10, 15, 20, or 30 years) at a relatively affordable cost. At the end of the term, the policy expires. If the policy holder dies during the stated term, the policy pays the listed beneficiary the benefit or face value of the insurance. However, if the person insured by the policy lives past the stated term of the policy, there is no benefit payment and the insurance policy expires. Term life is usually recommended for coverage of parents during the time that their children are young.
This policy can be most easily expressed in similar terms of an auto insurance policy. If you were to get into an accident while your auto policy is in effect, then compensations are paid by the insurance company. In contrast, if you were to get into an auto accident after the auto insurance policy expires, then you would not have coverage and no compensation would be paid. Of course, it’s always wise to contact an auto accident lawyer to ensure that your best interests are being looked after.
What is Whole Life Insurance?
Whole life insurance policies offer insurance up to the age of 100 or 120 and death benefits are paid out whenever the death of the insured person occurs or if they age out, whichever comes first. Each premium payment on the whole life insurance policy is allocated toward both the insurance and a portion of the premium is invested in an investment vehicle and gains a “cash value.”
Whole life insurance policies pay the death benefit whenever the insured dies up to age 100 or 120. If the insured outlives the policy, the policy will pay out the cash value to the named insured.
The cash value is invested and can be used to borrow against. Additionally, the cash value does gain interest.
The capital gain is tax-deferred if it is used while the insured party is still living.
If the named insured party dies, in most cases the proceeds are granted to the beneficiary tax-free.
Comparing Costs of a Whole Life vs. a Term Insurance Policy
As anyone would expect, whole life insurance is significantly more expensive than term life insurance. Additionally, whole life insurance policies have more hidden costs, like commission charges and fees associated with the investment portion of the policy.
Factors to Consider in Determining Which Policy is Best for You
Term life insurance has significantly lower premiums than whole life policies. In effect, the difference in premiums can be used to invest in your own choice of investment vehicle.
In the United States, term life insurance policies are often significantly more difficult to get as you age.
Generally, if you need insurance for terms fewer than 10 years, term life insurance would appear to be the most applicable and cost effective.
In contrast, for periods greater than 20 years, whole life insurance offers more benefits and is usually the more cost effective insurance policy.