Life insurance shoppers want to know: What is the difference between whole and term life insurance and what type of policy should I purchase? The answer is usually simple depending on the circumstances.
Listed below are life insurance explanations as well as recommendations for purchasing a life policy, tax avoidance and estate planning strategies.
Whole life is designed to cover the insured for his or her entire lifetime. A portion of the premiums pays for the cost of the insurance and a portion is invested in a fixed interest account usually referred to as the cash value account.
Over time the cash value will increase with additional premium deposits and interest credited in the fixed account. Eventually, the policy will be “paid up” meaning enough premiums have been deposited and the cash value has grown to cover the cost of insurance. When this occurs, the death benefit can also increase above and beyond the amount of insurance applied for.
Whole life has the advantage of covering the insured for life while also providing cash value for future needs. Owners can either withdrawal or borrow against their cash value for future monetary obligations. It is worth noting that there are several riders and versions of whole life insurance that can change the overall performance of the policy.
Term life insurance is the least expensive type available. The insured pays the premiums for a set term (say 30 years) and in essence rents the insurance for that time period. There is no cash value built up in the policy and all benefits will cease to exist when the term has expired.
Consumers purchase term life to cover their families financial obligations in the event of an untimely passing. The insured might take into account future mortgage payments, college tuition, debt, the cost of raising children, and several other factors when purchasing term life. Like all life policies, there are variations and riders available in the term marketplace.
In most cases, it is advisable to purchase term insurance. It is affordable and will provide peace of mind for the insured and his or her beneficiaries. Term will provide the cushion needed to in the event of a passing. Once the time period has expired, then conceivably the insured would be in a comfortable financial position – the kids are grown and out of the house and the mortgage is paid off.
Whole life makes more sense as a tax free investment that can be used to transfer significant amounts of wealth between generations. Life insurance benefits are tax free to the beneficiary(s) and can, in some states, also avoid inheritance taxes – Pennsylvania and New Jersey are two such states. Additionally, irrevocable life insurance trusts can be used to reduce federal estate taxes and to pare down owned assets.
Granted, this is a very simple explanation of the two most common types of life products. It is always best to work with a knowledgeable life insurance agency in order to find a suitable policy for your needs. Please contact our agency to learn more.