Term Versus Whole Life Insurance

If you're thinking about buying life insurance, you have two very different options: term and whole life. The basic difference between the two is that term insurance is strictly insurance while whole life is insurance plus an investment.

When you buy term life insurance, you pay a defined premium, which typically increases as you grow older. If you die while the policy is in effect, the policy pays out a fixed amount to your beneficiaries. You can buy term insurance for a period of one to thirty years.

Whole life insurance combines life insurance and an investment. Therefore, premiums for whole life are considerably higher than for term. Part of your premium is for the insurance itself. But most of your premium is invested in bonds, money market funds, or stocks. Whole life is a form of forced savings. Over a period of years, the value of your policy grows with your contributions and your return on investment.

There are several things to consider when trying to choose between term and whole life. Term is certainly less expensive. If you are just starting a family and you have a limited income, term insurance provides protection for your family at an affordable cost. On the other hand, if you want to put some money away for the future, you might consider whole life.

In considering whether to invest in whole life, you should think about what kind of saver and investor you are. If you are an active investor, buying stocks and bonds only when you think conditions are just right, then you might not want to use a whole life policy as an investment vehicle. The virtue of a whole life policy is that forces you to put money away on a regular basis. In other words, it forces you to be a regular saver. You don't need to research particular investments because they are chosen for you by professional investment experts. In a sense, a whole life policy is the lazy person's way to save. And, unlike term insurance, the premiums for a whole life policy don't go up as you get older.

So which is the better choice for you? It really depends on why you are buying insurance and how long you expect to have your policy. If you are just buying insurance to protect your family in the event of your death, you are probably better off with term insurance. But if you want to protect your family and put some money aside in a safe place, you should definitely consider whole life.

One word of caution about a whole life policy as an investment. If you are planning to cash in your policy for its face value after just a few years, then you should probably not invest in whole life. Whole life policies typically have a number of fees in the first year after you buy them. The longer you hold your policy, the better because the return you get on your investment will more than make up for these fees. Some experts believe that to get the most value from a whole life policy you should hold it for at least 20 years.

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