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What is Term Life Insurance and Whole Life Insurance?
You’ve been working full time for a few years now and you keep saying to yourself that you need to get some life insurance to cover your family. You’ve just been so busy you haven’t had time to get a policy. You may have heard about term life insurance and whole life insurance and don’t know the difference.
Term life insurance is basically insurance that pays the face value of the policy to the beneficiary when the insured dies. Term insurance can be for a set amount of years (up to 30). When you die your family receives the face value of the policy.
Whole life insurance involves investments that can increase in cash value. Some people borrow against their whole life insurance policy. When you die, your family also receives the face value of the policy, not the money earned. Term life insurance premiums are typically much lower than whole life premiums.
Some Information to Consider on for Coverage Amount
How much coverage should you get? I personally used MSN’s Life Insurance Needs Estimator. I entered some data and was given the ballpark figure of $100,000. Some questions you should ask yourself:
- How many years before you retire?
- Are you financially responsible for anyone other than yourself?
- In the event of your death, how much annual income would your spouse or partner be able to provide to compensate for the loss of yours?
- What is the approximate balance owed on your mortgage?
Use MSN’s tool to get a ballpark figure for yourself.
How would this breakdown with term and whole life insurance premiums?
Term life insurance for me would be $9-12/month while whole life is around $30-40/month. If I got term life insurance what could I do with the difference saved? Many suggest investing the money and build your own assets.
Tips When You’re Looking into Life Insurance
MSN offers some tips for those looking to get insured:
- Look at your budget before committing to a premium.
- Don’t let a policy lapse if you plan to buy another one at some point.
- If you are single and simply don’t want your relatives burdened with the cost of a funeral, consider contributing to a Totten trust savings account.
- Clean up credit issues before applying for insurance, because most companies base rates partly on credit history.
- Watch for hidden fees, including those for paying premiums by direct withdrawal from your checking account.
As with everything financial, you should check the company you’ll be insuring with to make sure your money is safe.
How many of you have life insurance? What kind do you have and why?
Photo Credit: woodleywonderworks
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I’m reading an interesting book that talks about insurance (Killing Sacred Cows). It says that whole life is better than term because you are getting better overall protection. The 30-year term life will run-out one day and if you still need coverage it will be very cost-prohibitive to get another policy.
This is a subject I need to look into more with my family. Thanks!
Check out FFBs last blog post..Obama 2009 Economic Stimulus Plan – It’s Gonna Be Big!
Interesting stuff. I was just talking about how our next move will be life insurance. So timely advice. Thanks!
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@FFB: Thanks for sharing the information. I guess the issue is how self-disciplined an individual is on the savings from term life premiums. Will they sock it away or will they spend it?
@Abigail: It’s something on our minds as well and I thought to look some information up. While I want to be helpful for readers, I started this as a way to learn about personal finances as well.
I have term life. One thing you have to do is shop around – there are large differences between companies.
FFB – if you make half decent money and manage it reasonably well then there is a good chance you’ll be financially independent in 30 years so you shouldn’t need much insurance if any at that time.
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@FP: Thanks for sharing your story! Good idea on shopping around. You never know what deal you c get. I use the web to get an idea of what’s out there for prices.
I’m a baby boomer and appreciate the fact that the need for life insurance disappears as you age. That is why when my children were born, I bought a 20 year level term policy that expires when they finish college. I did buy some hybrid term/whole life years ago but stopped paying premiums on that about ten years ago because the dividends pay the premiums. That will help my wife if I die before completing the full funding of our retirement plan. Once I retire, I will cash in that policy.
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@ Mr. GoTo: Congratulations on having a plan and staying with it. You obviously put thought into AND followed through with action.
Wonderful site by the way. I read your article on lake front vs ocean front homes. We rented a very small apartment across from the Chesapeake Bay. I loved the location, but to own a place, even a small condo, would be way out of our budget now. We moved more inland and enjoy our new spot.
In all my years selling life insurance, I have not seen one person who purchased term with the idea of banking the difference between term and whole life continue their savings program longer than a year. It’s a great idea, in theory, but you’re bucking up against human nature to spend money if it’s available. I do know many people who, in this recent financial debacle, find comfort in the fact that their whole life policies were unaffected and remain the best “investment” they have today.
Thanks for sharing your side of the situation. I’m personally hoping to follow Mr. GoTo’s example and build from the savings of term life insurance.
Like I mentioned before, I guess the issue is how self-disciplined an individual is on the savings from term life premiums.
That’s why it’s important to weigh the pros and cons for your family.
A couple of things to add to the post is that participating whole life (the only type you should look at) the death benefit increases over time because a majority of the cash value is paid out with the original face amount. Most people confuse this with Universal Life which usually has a flat face amount because it is basically permanent term insurance. In my experience, I’ve never seen a company factor the credit score into the premium.
The problem with most permanent policies is the agent that sells them. The policies themselves can be great when set up properly. I talk about this in a post titled “Life Insurance Secrets” http://evolutionofwealth.com/2009/08/24/life-insurance-secrets/
It’s unfortunate how much misinformation is out there because of people not properly trained and educated to do their job. Then again I guess the insurance companies are to blame for this because they do most of the training.
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Term Life insurance is the best option I think. The key is to shop around as mentioned in the the article and comments.
I have a universal life policy and a term policy that is 20 yr term so my youngest child will be out of college. The UL is just so they have money for final expenses and extra income . I would rather have whole life that UL but my agent doesn’t carry it. I have heard some downsides to UL if you know of any can you share them with me. Thanks
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