One thing insurance agents, financial planners and life insurance lawyers agree on is that life insurance is necessary for people with spouses, partners and children who depend upon the insured’s income. Those insurance agents and financial planners may not agree on what type of life insurance is best, though.
What Kind of Life Insurance is Needed?
Life insurance is an individualized decision. The policy type and amount needed must be tailored to each person’s circumstances. Factors that affect this decision include how many dependents a person has, what future expenses the life insurance is expected to cover and whether the spouse or partner has his or her own income.
These questions and more also help a person decide what type of insurance plan to purchase. The two main categories of life insurance are term insurance and whole life insurance.
What is Term Life Insurance?
Term life insurance is a policy that remains in effect for an agreed-upon number of years. If the policyholder dies within that time period, the insurance company pays the beneficiary the face value of the policy. If the policyholder does not die within that time period, the insurance coverage ends. In essence, what this means is the policyholder paid premiums while the insurance policy was in force but there was no payout.
What is Whole Life Insurance?
Whole life insurance is also called permanent insurance or straight life insurance. Whole life insurance is a policy that remains in effect until someone dies, as long as the premium payments are timely and current. Whole life policies build up a cash value over time that can be used by the policyholder for different purposes. Premium payments for most whole life policies remain the same throughout the insured’s lifetime. The premiums are higher for this type of insurance than for term life insurance.
What are Some Advantages of Whole Life Insurance?
Several types of permanent life insurance are available; whole life is just one kind. Universal life, variable life and variable universal life are three of the more common life insurance options offered.
One reason people choose whole life insurance over term life is that whole life builds up a cash value over time. As the cash value accumulates, the insurer invests a portion of the premiums and interest is earned for the policyholder. Sometimes dividends are paid out to policyholders. The dividends can be reinvested, building up the cash value of the policy or they can be used to reduce the premium payments.
Policyholders may borrow money from the cash value of a whole life insurance policy. A policyholder may also surrender such a policy for its cash value, which is determined at the time of the surrender based on outstanding loans against the policy and unpaid premiums.
The earnings on whole life insurance policies are generally not taxable on a yearly basis. This makes it an attractive policy to consider for estate planning purposes.
Whole life policies provide stability and predictability. The insured has coverage over his or her lifetime, regardless of changes in health. With straight whole life insurance, the insured has fixed premiums for his or her entire life.
Consulting with an attorney experienced in life insurance matters, a financial planner or another life insurance professional is strongly recommended for anyone exploring life insurance options. Insurance attorney Chad G. Boonswang understands the pros and cons of life insurance options and is ready to help you with your decision today.