Although we all want to save money, the cheapest life insurance policy is not always the best option. A few dollars a month now in your life insurance premium can create a mess of red tape when your loved ones are trying to collect on a policy after you have passed.
There are multiple types of life insurance policies out there, but most well known are term life insurance policies and whole life insurance policies. Most people think that whole life is the best alternative, but there is value to both types at different phases of your life. A wise financial planner would recommend that you have a combination of both whole life insurance and term life insurance, especially in early phases of your life. So what is the difference between term life insurance and whole life insurance?
Term life insurance is a policy that is set for a fixed term of your life (i.e. 10 year term, or 20 year term). During this time you have a guaranteed premium that is fixed and will not change. Term life insurance is typically cheaper, especially if you are young. This is because life insurance companies know that if you are 25 and have a 20 year term life insurance policy, the probability that you will die during that term is small. They stand to cash in all of the premiums without paying out a dime. Term life is a good option when you are young and have others who depend on you if you can not afford the expense of a whole life policy.
Whole life insurance, in comparison, is a policy that will remain through out the rest of your life, whether you die at 30 or 80 (most still have an end date at 95 or thereabout). The premiums for whole life insurance is typically much higher because the life insurance company knows that the only way they will not pay is in the event that you (1) stop paying or cancel the policy or (2) live beyond the end date (around 95). Additionally, whole life insurance will gain a cash value over time. As you pay your premium each month a portion goes into a cash account, which is invested to get a return (typically between 4-6%).
Although there are many advantages to both types of policies, the main advantages to a whole life insurance policy is that you can lock in a fixed premium for life and you can gain a cash value to increase the return. Term life is cheap when you are 25, but after your 20 year term (for example) you are now 45. Getting a new term life policy will be significantly more expensive than a whole life policy would have been if purchased at 25 or 30. Getting into a whole life insurance policy at a young age gives you the ability to fix the rate for life, which is very valuable considering the odds that you will see your health decline with age. Additionally, it is important to remember that a portion of the premium you pay is getting contributed to a cash account which will increase in value.
Given an understanding of these two types of policies, you must make a decision regarding the best fit for your life’s current circumstances. If you decide on whole life insurance comparison are invaluable. It is important that you obtain 3-5 quotes not only to get multiple rates and try to save a few bucks, but most importantly make sure that you have chosen the best policy. Some important considerations for your whole life insurance comparisons are:
1. How well is the company rated? In other words is there any risk that they will not have the financial ability to pay the death benefit? To check this out visit the website for AM Best. I recommend no less than a “B” rated company.
2. How will the company invest your cash account? Will you have any control over the investment options?
3. What fees are associated with the policy? There are sometime death benefit fees, fees if you take a loan against the policy. Understand the fee schedule.
4. When is the final age of payout? Is there a limit if you live to be 105?