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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Saturday, June 24, 2006

Life insurance is not always an easy concept to grasp and it gets more convoluted when discussing which is better: term versus permanent insurance. Because of the confusion getting the right information is crucial.

Term life policies offer death benefits only upon the policyholder's death.

Whole Life insurance policies
offer death benefits plus an account value so that if you live you will receive some amount of money spent on premiums back. It is a sort of hedge or a way to have your cake and eat it too. The policyholder can receive their money back by cashing in their whole life policy or borrowing against it like a home equity loan.

Whole life insurance is more expansive than term life insurance. You will pay more in premiums because you are investing and owning life insurance. So like a savings account, the longer you have paid into it the more it will accrue and the higher cash value it will have.

  • Term life insurance is strictly a payment if you die; no savings or interst accuring. Premiums for term life insurance will increase over time while whole life insurance premiums typically do not.
  • Whole life insurance's high premiums at the start means it will grow just like a retirement account.
  • The downside is that your life insurance agent gets a sales commission on the whole life policy just as would a stock broker would get a commission by you buying a certain mutual fund that his or hers investing house has a sales deal.
  • With whole life insurance the cash value of the account is tax-free to your beneficiary.

You will hear many like Suze Orman say to buy term life insurance and never buy whole life.
The length of time you plan to have the insurance is important in making your decision between the two life insurance products. However, there are so many variable that it makes it difficult to make the blanket statement that if you plan to have the life insurance over 20 years you should get whole life insurance.

Compare

Term insurance
  1. You can buy term insurance that stops after a specific term, e.g. 10 or 20 years, or that can be continued until age 70 or later. You have the option of choosing to have your premium increase every year--annual renewal term--or you can pay the same amount for your premium for a fixed number of years.
  2. Most term policies the options of current payment schedule and a maximum rate. Your insurance company wants to be able to raise premiums if the company's costs increase. With others, the issue is your health.
  3. Sometimes you will be required at specific re-entry ages to display good health to keep your premiums low.
  4. Most term policies can be converted into whole life policies without evidence of good health.
  • Universal life insurance is more flexible than traditional whole life because the premiums can vary from year to year. Universal life has maximum guaranteed premiums and least minimum guaranteed cash values and death benefits. Instead of dividends, universal life policies earn interest at the credited interest rate determined each year.
  • Variable life insurance provides few guarantees and with risk can come reward if the investments go well. There are required guaranteed annual premiums and a guaranteed minimum death benefit. However, if you pick the wrong investments it will hurt your cash value.
Do Not:
  1. Use Life insurance only as an investment. After all, some of your premiums are being used to buy the death-benefit coverage and to cover other expenses.
  2. Life insurance should not be purchased on children to save for college.
  3. You should have all the coverage you need before you buy any on your children.

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