Did you think that all life insurance policies were the same? Whether you’re out there selling life insurance or in the market to buy, it’s important that you understand the vast landscape of potential policies that exist, and how most people should go about narrowing down what’s right for them. Today, we’ll be exploring the major types of life insurance so that you have a better idea of how they vary and why people would choose one over the other.
Term Life Insurance
When referring to life insurance policies, most people are thinking of one of two varieties — term or whole life insurance. These have long been the two most popular varieties of life insurance, and in the case of term life insurance, the easiest for neophytes to comprehend.
Term life insurance refers to life insurance that lasts for a particular term — five years, ten years, 20 years, etc. — after which the policy expires. Should you die while your policy is active your beneficiary will receive a payment from the insurance provider. Term life insurance is straightforward, which is why many choose it, but it is also attractive because it is often cheaper than other policies and will expire after the amount of time that you select.
That’s also a potential drawback to term plans, however, because after that expiration date you’ll have spent money on a policy for no reason other than the peace of mind it provided. These policies can’t be used to help build a bit of wealth or as a tax-planning strategy, unlike whole life insurance policies.
Whole Life Insurance
The main counterpart to term life insurance policies, whole life insurance policies are permanent, meaning they never expire so long as you keep paying your premiums. One part of that premium goes to your insurance, while another, in most cases, goes toward building a cash value account that you can tap for funds down the road if you so choose.
That cash value account grows at a guaranteed rate, and you can use it to pay for expenses by taking out a tax-free loan. It’s important to realize, however, that this will deduct from your death benefits if you don’t pay that loan back, so with a whole life insurance policy, you need to make sure you can replenish what you borrow plus interest if you want your beneficiaries to receive their full value from the policy.
So, while whole life insurance policies are more flexible from a financial planning standpoint, there are also situations where a term policy might be all you need. Be sure to weigh the pros and cons of each before arriving at your decision.