Whole life insurance is also known as cash value and universal life. It is the original kind of life insurance and has been around for about a hundred years. Term, which is much less expensive and more affordable, is a fairly recent innovation. Here are the basic differences between term life insurance vs whole life insurance.
The cheaper insurance is term. It’s so much cheaper because you are only buying the insurance. You aren’t paying high premiums that the insurance company is going to invest for you. You are also only paying for a period of time, or the term, and the insurance company is betting – in the truest sense of the word – that you won’t die during the term of the policy.
With whole life, because you are paying for and are covered for your whole life, they know they will absolutely need to pay the death benefit sooner or later, as long as the policy stays in effect.
If you want nothing more than insurance, and that should be everyone’s goal, you only need a term life policy. Let’s say you just got married and you want to get a policy for you and your wife. At the age of 28 you two can get a 20 year term policy with maybe $250,000 coverage for each of you, for less than $100 a month. If you have children, you can add them all on a rider for a few dollars a month. This is one rider per policy, not per child! If you have a rider on your children for $10,000, you can have 7 kids and still be covered.
If you have a whole life policy, a major part of your premiums are used for your investment portion. The problem with this type of investment is that you only receive a tiny portion of any profits made from these investments. Your insurance agent will never tell you this, although it is clearly outlined (in small print of course) in the actual policy itself. If your agent is telling you that “your investment is assured to have a return of about 15% a year”, he’s probably right. What he doesn’t tell you, however, is you will only see about 3% – the insurance company keeps the rest!
With whole life, one reason it’s so expensive is because it’s set up to act as a savings account as well. When you buy your policy you are asked to choose funds from the insurance carrier’s limited selection, in which to invest. Your agent tells you your investment will see a 15% return each year, but what he doesn’t tell you is that you only see a fraction of this – about 3%. The insurance company keeps the rest!
It’s never a good idea to mix insurance and investments or savings. With a whole life policy, when you die, all that the insurance company pays out is your death benefit! They keep the investments and cash for themselves. So, if your family thinks they will be well provided for because they are depending on your investment portfolio, there isn’t one!
If you happen to borrow any of this money, by the way, your death benefit is decreased until you pay yourself back. With interest!
You can use the term life insurance calculator to find the best level of coverage today! When looking at term life insurance vs whole life insurance, a person will be able to see the benefits and advantages of each type of coverage instantly!
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