It may be a tough thought to imagine, yet you may not always be around. This emotionally trying time could be hard for your family, especially if they rely on you for financial support.
Six in 15 households would struggle to pay the bills if the primary breadwinner died, according to recent reports.
Term vs. Whole Life Insurance Overview
Term life insurance is financial protection for a set number of years, and it may be the affordable option that would fit your needs.
Whole life insurance offers permanent protection for the rest of your life.
This differs from term insurance that covers you for a defined period.
One of the other big differences between term life insurance and whole life insurance is that whole life can accumulate cash.
You may also receive dividends from your provider. Consider a whole life insurance policy if you prefer lifelong coverage with savings benefits.
Whole life insurance is a choice because your family may need cash to pay for your estate taxes at death.
You would want coverage for your final expenses, or you’d like to fund a trust to pass on to the next generation.
Term life is “pure” insurance, where whole life insurance adds a cash value component which can be tapped into during your lifetime.
Term coverage only protects you for a limited number of years, while whole life provides lifelong protection if you can keep up with the premium payments.
Whole life premiums can cost five to 15 times more than term policies with the same death benefit, so they may not be an option for people on a strict budget.
What Is Term Life Insurance?
Term life insurance is the easiest to understand. It’s straightforward insurance without the bells and whistles.
The only reason to buy a term policy is because of the promise of a death benefit.
It pays for the beneficiary should they pass away while it’s in force.
This stripped-down form of insurance is only good for a certain period.
This could be five years, 25 years, or 35 years. After that, the policy just expires.
Because of its simplicity and finite duration, these term policies also are the cheaper.
If all you seek from a life insurance policy is the ability to protect your family when you die, term is likely the best fit.
One example is many new parents purchase term insurance that lasts just long enough for their kids to finish college or join the workforce full time.
A variety of factors will change policy prices. For example, a larger death benefit or longer length of coverage will increase the premiums.
Keep in mind that most term policies require a medical exam. This makes health complications raise your rates above the norm.
Because term insurance eventually expires, you can end up spending all that money for no purpose other than peace of mind. Also, you can’t use your investment in term insurance to build wealth or save on taxes.
However, term insurance has a much lower cost than other types of life insurance. It is simpler to understand than “permanent” policies.
A few negatives is the protection is only available for the term of the policy and it can’t be used as a wealth-building or tax-planning strategy.
What Is Whole Life Insurance?
Whole life insurance is a permanent life insurance.
This means the insurance covers the policyholder for the duration of their life as long as premiums are paid on time.
Permanent life insurance differs from term life insurance, which covers the insured person for a set amount of time (usually between 10 and 30 years).
Whole life insurance is the most common type of permanent life insurance policy that people purchase. This is according to the Insurance Information Institute (III).
Like most permanent life insurance policies, whole life also offers a savings component, which is referred to as “cash value.”
What Are The Benefits Of Whole Life Insurance?
There are several parts of whole life insurance that can make it an attractive choice.
Your premiums are fixed and will never go up. This is regardless of market conditions.
Most plans are written so the insured can withdraw funds or take out a loan.
Death benefits are guaranteed as long as the required premium payments are paid.
In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy.
A universal life insurance policy, on the other hand, may offer the option to adjust your premiums or death benefit over time but lets not get off track.
Because whole life insurance gives you fixed premiums and a fixed death benefit, you won’t have to worry about increased premiums as you get older.
Your loved ones will know how much to expect when your life insurance benefit is paid out after you pass away.
Whole Life Builds Cash Value
A whole life policy can serve as a source of emergency funds for you if something happens like a costly emergency.
The policy holder may also take out a loan against the policy, in most cases. That’s because it funnels a portion of each premium payment into a savings component of the policy called the “cash value.”
Over time, the cash value of the whole life policy increases. The policy holder may be able to withdraw funds or borrow against it.
The rules on how and when this can be done vary by company and policy. The insurer may also offer guidelines to follow so that the policyholder won’t inadvertently reduce the policy’s death benefit or create a tax burden.
How Much Does Whole Life Insurance Cost?
The cost of a whole life insurance policy depends on several factors. This includes how much coverage is bought and other things.
With paying premiums, the policyholder makes a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly, or twice a year.
Most of the time paying premiums more frequently than once per year, like making monthly payments, may incur additional fees.
Are Whole Life Insurance Premiums Tax Deductible?
According to the Internal Revenue Service, you cannot deduct premiums you paid for a whole life insurance policy on your tax return.
The principal reason is if your beneficiaries receive the death benefit from your policy, they likely would not have to pay federal income taxes on that benefit.
Be advised that they will probably consider any interest earned on top of the death benefit taxable income.
Who Should Take Out A Whole Life Insurance Policy?
A whole life insurance policy might be a fit for someone who likes predictability. Since whole life insurance offers death benefit guarantees and fixed premiums, it’s stable and solid.
If you’re considering a whole life insurance policy, it may be a good idea to talk it over with an agent.
Experienced life insurance agents can help you review the different options before you make any decisions.
Using that approach ensures confidence and certainty that you’ve chosen the life insurance policy that works best for you and your family.
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