The main thing to keep in mind when thinking about what type of life insurance you should buy is to first determine why you are buying the insurance in the first place. There are many reasons why you need life insurance. Some of these reasons can include the following:
- Final costs including funeral and debts.
- Mortgage pay off to make life financially easier for the family you leave behind.
- Business or other debts.
- To leave a legacy such as a sum of money to your family or a charitable organization.
- Retirement benefits.
- To create an annuity for the ongoing financing of your family.
When you know what you want to cover, it will make it easier to decide whether you need to take out a term life insurance or whole life policy. Although both these types of life insurance pay out an agreed amount of money on your death, they are vastly different from each other. When you consider their purpose, the choice is easier… you may even choose a combination of both. Let’s look at term life insurance first.
Term Life Insurance
Term life insurance is similar to the type of insurance you buy to protect yourself from loss when you take out fire and general insurance on your material assets such as your house or car. The coverage is only for a specific period of time. During that time if your home were to burn down you would receive the insured amount but if it burned down the day after the policy expired you would receive nothing. This means you have to keep renewing the policy to remain covered and any premiums you pay during the period of cover are forfeited if you don’t make a claim.
This type of life insurance is quite cheap, especially during your younger years, but the premium cost increases with age, and when the time comes to renew the policy, it can become quite expensive in your later years. Term life insurance is ideal if you need to take out large amounts of insurance during the periods in your life when you carry large responsibilities. Such periods could be when you marry, buy a home and borrow a large amount of money. Your responsibilities grow further when children start coming along. It is therefore the type of life insurance you would most likely choose to create an annuity for your family should you happen to die during the height of bringing up your family. Term life insurance could best be considered for the following reasons:
- Create an annuity to finance the ongoing needs of your family should you happen to die prematurely.
- Cover business and other debts.
- Pay off your mortgage, credit cards, car loans and other debts.
- Low Cost.
- Higher Coverage for the same price.
Whole Life Insurance
Whole life Insurance was once the most popular of the two types of insurances. One reason was that it was pushed rather vigorously by life insurance agents as they received higher commissions for doing so. The other was because there was a lot more mystique about investment than there is today and many people used whole life policies as an easy way of investing for the future.
Because whole life insurance, like any other permanent life insurance policy, covers you for the whole of your life, the premium you were charged at the beginning will remain the same throughout your entire life. The premium pays for two distinct parts of the policy. One being the life cover you have taken out and the other is the investment component. The investment portion means the policy’s cash value grows as time goes on and you can borrow from it whenever you wish to do so. You can also cash it in to retrieve the profits from the investment portion if you wish, but if you do so you will terminate your insurance cover at the same time. Because you are always guaranteed a pay out of some value, a whole life insurance policy is more expensive than term life insurance. It is also much cheaper to buy in your younger years than when you get older. Financial advisers these days prefer people to invest their money in higher paying yields than that of whole life insurance contracts but such insurance still has a great appeal to many for the following reasons:
- Creation of retirement benefits. You can cash in the policy whenever you wish to do so as you age, or leave it intact to bequeath to family members, or as a legacy to an organisation when you finally pass away.
- Payment of funeral costs and any other debts.
- Rates never go up no matter what your future health circumstances.
- Guaranteed coverage throught your entire life.
- Payouts can be tax free.
Many people find it advantageous to purchase whole of life assurance at a young age to primarily pay funeral costs and any debts left behind. At the same time the investment portion can grow and you can always get your premium money back if the need ever arises. You can also borrow from it if the money is needed. If you take out a whole life insurance policy as a basic policy you can boost your cover cheaply by buying larger amounts of term life insurance when you need the extra cover for the more financially vulnerable periods of your life.
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