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Term Insurance or Whole Life Insurance?

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There are two main types of insurance – term and permanent/whole life insurance. For many, term insurance is a good route because it is the least expensive life insurance. Some folks like the many bells and whistles that go with permanent insurance along with life time coverage. Of course this makes whole life insurance more costly.

Term Insurance

Term insurance is the least expensive. Benefits are payable at death as long as it occurs during the term of the policy. Coverage is purchased at a specific price for a specific period – the length of period can range usually from one year to 30 years.

If you have certain expenses that need to be paid off during a certain period, term is the way to go. Such expenses, like your mortgage or college education for children, are great examples of this. Let’s say you have a 15-year mortgage and your debt is $250,000. You may consider a 15-year policy to protect your family for the amount you owe. Same thing if you have young children. Match up the amount of insurance you buy with your expected tuition bill. Keep in mind that you must adjust today’s college expenses for inflation.

Remember that term insurance is inexpensive because your coverage lasts for a limited time and there is no investment component. The money you save by purchasing term instead of whole life, however, could always go into your own investment account or disability insurance.

Whole life/Permanent Insurance

Permanent or whole life insurance is more expensive and it covers you whether you die today or when you’re 100. If a savings component and lifetime coverage is important to you, permanent insurance is the answer. Different kinds of permanent insurance policies include traditional whole life, universal life, variable life, and variable/universal life.

Other than the lasting nature of coverage, you may want to consider the savings aspect of these policies. The savings component grows tax deferred and can be used to pay the premium and keep the life insurance in force. You may also borrow against these funds using the death benefit as collateral for the loan. If you happen to die with an outstanding loan, the insurance company collects the amount owed to them then pays out the remaining death benefit to your beneficiaries.

Which is the best for you?

Which type of policy is better? That depends. If you are on a tight budget, then term insurance may be the only answer. This is especially the case if you need a huge amount of coverage and are considering other types of coverage like disability insurance and/or long term care insurance.

Permanent insurance is the right route if you like the savings aspect and protection put together. Also, if you’re older, have a higher net worth, and may owe large estate taxes at death, permanent insurance might be more advantageous. Do your homework and you’ll find the right policy to suit your financial plan.

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