Determining which life insurance is right for you and your family can be a confusing topic. Should you buy term life or whole life insurance? Deciding which to purchase is a personal decision that should be based on the financial needs of your family as well as your financial goals. However, no matter what, life insurance is a very important part of your family’s financial security.
Before deciding on which life insurance policy is best for you, everyone must understand why you need life insurance. The purpose of life insurance is to replace the salary of a family member. Even in families where both partners work, the wages of both may be critical to meeting major expenses. The death of one earner could leave your family burdened with debt. Life insurance is frequently based on your current standard of living and is designed to help your family maintain this lifestyle. With the right policy in place, you get peace of mind knowing that your family will be taken care of if something were to happen to you or your spouse.
Term life insurance
Term life insurance is designed only to protect your dependents in case you die prematurely. You purchase your policy for a specific time period, or “term”, such as 10, 20, 25 years. There is a start date, and there is an end date. If the end date arrives and you have outlived your term life insurance policy, it goes away. Benefits are only paid if you die within the term of the policy.
Term life insurance is the more affordable life insurance to buy, especially if you are young and healthy. However it does get more expensive as you age. For most policies:
- The death benefit and the cost, or premium, stay the same throughout the term.
- You do have the option to renew after the initial term runs out, but the renewal rate is often prohibitively expensive.
You should buy an amount that would provide for your family if you were no longer there to provide for them. Determining this amount is a discussion you should have with your financial planner. There are more factors that may go into the calculation than you may realize. And if you are listening to your financial advisor and investing for your future needs, you may not need a life insurance policy to cover you forever.
Most term life policies are convertible to permanent coverage. You should check with your insurance agent to understand the deadline if you are interested in converting your policy.
Whole life insurance
Whole life insurance means that it covers you for your entire life. It’s the more expensive option, but it is meant to cover you forever. A whole life policy also includes an investment component known as the policy’s cash value which grows slowly and is tax-deferred.
Whole life insurance can be the proper fit for your insurance needs in any number of circumstances, even if it’s just wanting a policy in place for the long run. Overall, whole life insurance may be an ideal fit for you if you:
- Need to pass your assets to a next generation while bypassing estate taxes
- Have larger assets
- Have a special needs child
- Are independently wealthy
- Have maxed out your investments, such as IRAs, and still have some money to put away in tax-deferred accounts
You don’t have to be extremely wealthy to acquire whole life insurance. Your insurance needs could make whole life insurance a better fit, no matter how much money you’re putting into your premiums. It’s a formula to discuss with your personal finance advisor. But to simplify things for the time being, you eventually get paid if you have whole life insurance provided the following three conditions are met:
- You keep paying your premiums
- Your contract stays in force
- The insurance company performs like they say they’re going to
Don’t just set it and forget it
Be sure to pay premiums on time and keep an eye on your contract. Review any communication from the insurance company so that there aren’t any issues that would make your life insurance contract void.
You should review your life insurance policy (as well as other insurance policies) on a regular basis, particularly if your life conditions change over time. You may find yourself with additional responsibilities such as a disabled or injured adult child or spouse. Or perhaps you may find yourself as the recipient of an inheritance or that your property and belongings are worth more than you thought. Whatever the conditions sculpting your personal financial outlook, make sure that you have the proper life insurance for you.
Listen to our podcast for more information and contact us to let us help you decide which life insurance is right for you.