Take time to do industry research and consider all options carefully - from whole or universal coverage to term policies – in order to make an educated decision about which type is best suited for protecting you and your loved ones.
Term insurance is the most basic and affordable type of life insurance. It is also the most popular type of policy. With term insurance, you are insured for a specific period, typically 20 or 30 years. If you die during that period, the death benefit is paid out. If you live beyond the term of the policy, it simply expires and you are no longer insured.
Pros and Cons of Term Life Insurance
Term life insurance offers plenty of advantages over whole-life policies, but sometimes buyers are tempted by the cash value proposition. Here is an overview of the pros and cons of term life insurance.
More affordable than whole life insurance
You can invest your money how you want, instead of locking it into a low-return investment
Whole life insurance agencies will say "lack of investment"
What is whole life insurance?
With whole life insurance, you benefit from lifelong coverage. Think of it as a long-term investment that doubles as an all-encompassing security blanket.
Whole life insurance, also known as cash value insurance, costs more because it’s designed to build cash value.
Whole life insurance is perfect for those looking to capitalize on the power of compounding interest in a manageable package. It combines both an investment account and policy into one; providing powerful financial protection while offering opportunities to grow their money over time.
Pros and Cons of Whole Life Insurance
With one of the least favorable financial products out there and a potential to cause serious budget damage, here are the pros and cons of whole life insurance.
build cash value over time
more expensive than term life
does two jobs at once, but doesn't do it very well
delays you from becoming self-insured
if you die without cashing out, you could lose a lot of cash value
Term life insurance is significantly cheaper than whole life insurance. Anddd of course it would be, because the extra money you're paying for your whole life insurance policy, goes to your investment account - right?(keep reading)
Option 1: He is offered a whole life insurance policy for $260 per month.
If Peter were to go with the whole life insurance policy, the first 3 years of the policy, most of the investment disappears due to hidden fees. After that, the cash value portion will kick in, but a very low rate of return; sometimes as low as 1-3%.
Option 2: Peter is also offered a 20-year term, $250,000 in coverage, for $13 a month.
If Peter decides to go with the term life insurance policy and instead invest the $247 per month he would save by not choosing the whole life plan.
Let's say Peter invested the money he would save by choosing the term life insurance quote, and put it into a growth stock mutual fund with an 11% average annual rate of return, he would have about $214,000 in investments by the time his 20-year term life policy expires and more than $2.1 million at age 70.
If Peter paid $260 per month for his whole life policy, with $15 going to the insurance and the rest into his savings account with about a 2% return rate, Peter's (roughly) $180,000 in cash value is kept by the insurance company. The only person who can take out the cash value is Peter and his family only receives $250,000.
With a term life policy, although there is no investment that is saved over time (like with buying a home), there is also no risk in losing the investment either.