Whole or Term Life Insurance: Choosing the Right Option
Both whole and term life insurance policies have their own benefits and the plan you choose should be made in the context of your overall financial plan. These products have distinct differences and understanding these differences can help you make the right choice for you.
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Why go with whole life insurance?
Whole life insurance is really like two products in one. The first thing you are paying for is a set death benefit that will be paid out regardless of when you die; this death benefit is guaranteed for life, as long as you continue to pay for your premiums. This is a great tool if you want to use such a policy in estate planning, as it ensures, regardless of when you die, that your beneficiaries will get a payout and potentially even garner some tax advantages over a simple inheritance.
The second benefit whole life insurance is the cash value of the policy. Part of your premium goes into a savings account that grows at a fixed rate over time. Therefore, this policy can in a sense act like a forced savings account. If for whatever reason you decide to discontinue your plan, part of this cash value can be paid back to you or else it will be left for your beneficiaries.
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Why go with term life insurance?
Term life insurance is the "value" option; basically you're only paying for the death benefit, and the death benefit is only in effect, for a fixed length of time. This is of tremendous advantage if you do not have the cash flow to pay high premiums or if you want extra coverage for a pre-determined period of time at an affordable price. For example, if you have young children that rely heavily on your income then it is important that you purchase a very high death benefit to provide for them. A term life insurance policy can fill in this need in conjunction with a smaller death benefit whole life insurance plan.