If you have a family, then term life insurance is a must. You want your family to be provided for if you pass away unexpectedly. Although in day-to-day life there’s not much that we can do to prepare for an unexpected death, life insurance is something you can set in place to protect the future of those you love.
Why Is Term Life Insurance Better Than Whole Life Insurance
You have probably already decided that you need to get life insurance. Great! Now for the follow-up question: term or whole life insurance? Before you decide, let’s give you a rundown of what they are.
What Is Term Life Insurance?
A term life insurance policy is one that will only last for a specific time period. This is usually between 10 to 30 years. You get to decide how long you want the term to be.
This type of life insurance has no cash value, which means that you can’t take it out, as it is not an investment. The only time it will be paid out is when the principal member passes away. Term life insurance is much cheaper than whole life insurance.
What Is Whole Life Insurance?
A whole life insurance policy is one that will cover you for your entire life. It is significantly more expensive because it is building up cash value. This means that it is also a kind of investment account.
The money you pay in usually grows in a fund where you will not have to pay tax on the gains you are making. You could also borrow money out of this fund, if you would like. However, you need to be careful with this because if you are unable to pay back the policy loans, including interest, you will end up reducing your death benefit.
Comparing Costs Between Whole and Term Insurance
Regardless of whether you choose to go with term life insurance or whole life insurance, you should always compare quotes. Of course you want something that will protect your family should you pass away, but you do not want to be paying unnecessarily. This is why you need to shop the market.
Your choice between whole or term insurance will affect the price drastically. Whole insurance is quite a bit more than term insurance because it covers you for the rest of your life and there is a cash value attached to it.
To put in perspective let’s use the average life insurance rates. Let’s say you are a 30 year old male, and you want to take out a policy that pays out $500, 000. If you take out a whole life insurance plan, you will be spending a little over $4, 000 per year. For a 20 year term insurance policy, you will be paying $228 per year. Just looking at these numbers, you can see there is a huge difference!
The older you are, the more each premium will cost you because they take into account life expectancy and health. If you end up taking this insurance out when you are 50, these numbers will most likely double.
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The Truth About Term Life Insurance
Many people go for the whole insurance option because it seems safer and has some cash value. Usually insurance companies will sell this to you as a life insurance and an investment opportunity, which sounds great to the average person.
However, this investment is not as great as it might seem. If you take the difference from the whole and term insurances and invest it into a mutual fund with a 10% rate of return, you could make far more. In the case of the 30 year old male, you would have $3772 a year to invest how you choose. Plus you would be getting the same amount of cover.
The other reason people go for whole life insurance is because it covers you for the rest of your life. This may seem like the smarter move, but you have to ask yourself whether you need this insurance for the rest of your life.
The truth is that you will only need life insurance as a financial protection for your family. When your kids grow up and move out you most people no longer need the policy because the kids are done with college and can take care of themselves.
As you get older the amount of things you have to pay for lessens. You would have probably paid off your mortgage, cars, and any other long term financial commitments. Whatever savings you have for retirement and any investments you have made will be enough to sustain you and your spouse.
If you have invested your money wisely and have planned in advance for financial freedom when you retire then you do not need life insurance once the kids are out of the house and all your major financial commitments.
How to Choose the Term Length and Amount of Your Insurance Policy
You can choose the length of term in your insurance policy based on the stage of life you are in when you take it out. A 30 year old person could take out a 30 year term insurance if they have young children and are still planning on growing their family. A 40 year old person with older kids might only need to take out a 10 or 20 year life insurance policy.
If you don’t have kids, you should still take out life insurance based on your long term payments. Usually this is your mortgage. This is so that if you were to pass away, your spouse would be able to pay off the mortgage and stay in the house. If you have 15 years on your mortgage payment, then you should take a 20 year policy so that you have cover for a longer period, just in case.
If you are struggling with making the decision on how much term life insurance you should get there is an easy fix for that. All you have to do is multiply your annual income by about 12. This will insure that your salary can be replaced and your family is taken care off should something happen to you. Both spouses, even if one is a stay at home parent, should have life insurance.
Related Article: How To Prepare For A Recession To Protect Your Finances
Final Words
Term life insurance is an incredibly important thing for you to have, but that does not mean that you have to pay unnecessarily for it.
If you make the right investments, save, and plan for the future you will have more than enough money to carry you through your retirement without life insurance. It comes down to preparing for what you need to and then placing as much money as you can in smart areas that will give you the best return.
