With the circumstances of the world changing so rapidly, there is little to no guarantee of living a very long life.
Every day, we hear about untimely deaths in motor vehicle collisions, disease (Covid 19 Pandemic), natural disasters, and accidents.
While the victim loses their life, those left behind are tasked with picking up the pieces.
Many times the family of the deceased is unaware or unable to take care of medical bills along with funeral costs or any debts left behind.
When the world is so uncertain, the best thing we can do is make arrangements for the worst-case scenario while we are still alive.
By investing in life insurance, you can not only rest easy that your family will be taken care of in the event of a catastrophe but also take care of your final expenses yourself.
Whether it’s hospital bills unsettled debts or any financial obligations the money can be used to compensate for any expenditure of the deceased, and the remaining amount will be transferred to the beneficiaries.
Types of Life Insurance
Before purchasing life insurance, it is essential to understand the types of life insurance policies.
There are two main types of policies; term life insurance and whole life insurance. Both the policies allow you to leave a death benefit payable to your beneficiaries in the event of your death when you’ve been paying the monthly premiums for a given amount of time.
However, there are key differences between the two, depending on which you may choose term life or whole life insurance.
Term Life Insurance
Term life insurance, also known as pure life insurance, consists of receiving a death benefit if the policyholder passes away in a given period, during which he was paying monthly premiums. Depending on the customer’s requirement, term life insurance policies can be purchased for 10, 15, or even 20 years. Once the period is complete and the policyholder is alive, they can either extend it by renewing it, converting it to permanent life insurance, or allowing the policy to terminate.
If the policyholder dies within the specified term, the insurance company pays a death benefit to the beneficiaries, which can then be used to cover any and all kinds of expenses of the deceased. Term life insurance has no savings component, and the monthly premiums are determined according to a person’s age, health, and average life expectancy.
Whole Life Insurance (Permanent Life Insurance)
Often referred to as traditional life insurance, a whole life insurance policy consists of a death benefit lifelong coverage that extends for the duration of the insured person’s life. The death benefit is payable to the beneficiaries in the event of the policyholder’s death. In addition to that, whole life coverage also has a savings component that can accumulate cash value. It is possible to use this money instead of personal or bank loans.
Whole life insurance, along with universal life, indexed universal life, and variable universal life is a type of permanent insurance. The cash component (investment vehicle), accumulated on a tax-advantaged basis (tax benefits), can be invested for retirement planning, borrowed, or withdrawn during the policyholder’s lifetime.
5 Reasons Not To Buy Term Life Insurance
While the two types of life insurance policies may seem similar, there are certain reasons why whole life insurance is considered better than term life insurance. Here, we are going to outline some of them.
1. No Cash Value
The most significant drawback of term life insurance is that it offers no cash value component that can build up over time on a tax-advantaged basis. Since there is no cash value, no money can be withdrawn or borrowed from the policy. Term life insurance only consists of a death benefit that is payable in the event of the policyholder’s demise.
2. Low Claims Rate
Term life insurance only covers the insured if they die during the term of their policy. If you outlive your policy, you have a choice to renew it, convert it into whole life insurance, or terminate it altogether. However, according to statistics, approximately 1% of the policyholders actually die within the given term and claim benefits. While the good news is that you are still alive, the bad news is your policy has expired, and the premiums you paid over the set period will not be making a return.
Term life insurance can be purchased for 10, 15, or 20 years, depending on your requirement. However, if you buy the policy when you are, say, 40, the twenty-year term life insurance will expire when you are 60 years old. Term life insurance policies usually cannot be bought over a specific age limit, which means once the set period is up, you may not be eligible for term life insurance anymore. Even if you opt to convert your term life policy into whole life insurance, the cost alone will be too much at that age.
4. Unexpected Rise In Premiums
If you buy your term life insurance during your 20s or 30s, the monthly payable premiums will be low. However, once the policy expires after the given 10, 20, or even 30 years, not only will it be harder for you to renew the term insurance policy, but once you can do it, the premiums will be much higher. For a term life insurance policy, the premiums only stay the same as long as the policy is viable. Once it expires, the premiums will be set according to your age and life expectancy at that time, which are bound to be much higher.
Most insurance companies do not provide term life insurance to individuals over 75 years of age or coverage amounts less than $100,000. This means if you are in your sixties, finding an insurance company that is willing to provide term life insurance is not only challenging, it is costly in terms of monthly premiums.
How Does A Term Life Insurance Policy Work?
Once a term life insurance policy is purchased, the monthly premiums are determined according to the total death benefit payout and the policyholder’s age, gender, and health conditions.
Some companies also carry out a medical exam and ask about your history of smoking, driving record, current medications, occupation, hobbies, and family history.
If the policyholder expires during the given term, the insurance company pays a death benefit that is non-taxable to the beneficiaries. This money can be used for any number of purposes, from funeral costs, hospital bills, any outstanding debts such as mortgage and consumer debts, and any remaining amount to be paid to the beneficiaries.
In case the policy expires before the demise of the policyholder, the customer has the option of either renewing the term insurance policy, converting it to whole life insurance, or terminating the policy.
However, it is to be kept in mind that once a term life insurance policy expires and the customer chooses to renew it, the monthly premiums will be calculated according to age and health conditions of the policyholder then, which will be significantly higher than the previous ones.
Term Life Insurance: Coverage And Benefits
Term life insurance, when purchased by a customer, binds the insurance company to pay a death benefit to the beneficiaries if the person dies during the given period. Unlike whole life insurance, term life insurance does not have a cash value component. Since there is no non-taxed component, no money can be withdrawn by the policyholder at any given time during the term, even if the payments of the premiums have been regular.
The benefit of purchasing a term life policy is that it is the cheapest form of life insurance since it does not have a cash component and is only viable for a specific period.
Not only that, you can often choose larger payouts in terms of death benefit to protect more lost income for a minimal monthly premium. For instance, a twenty to thirty-year-old non-smoker who is otherwise healthy can purchase a payout of up to $250,000 with $20-$30 in monthly premiums.
Since a young, healthy individual is unlikely to die during a given term, the insurer does not pose a significant risk which is why large face values can be promised at very low premiums.
Monthly payments for the whole life insurance policy for a similar face value will be around $200 to $300 since that policy is going to last until the policyholder dies, whenever that may be.
Types Of Term Life Insurance
Term life policies come in several types. These include:
1. Level-Term or Level-Premium Policy
Level term insurance lasts for the ten to thirty years of the policy coverage. Both the monthly premiums and the death benefits are fixed. Since the company must account for the rising costs of insurance over the life of the policy’s effectiveness, the monthly fees are relatively higher.
2. Yearly-Renewable-Term (YRT) Policy
As the name indicates, the yearly renewable term policy can be renewed each year with no proof of the policyholder’s insurability. Since the policy is to be renewed each year, the premiums also change, steadily rising according to the customer’s age until they get extremely expensive.
While there is no term for expiry, the higher premiums cost is a drawback that makes the policy an unattractive choice for most consumers. It is possible it can save money on this type of coverage if your financial situation, financial goals and time period of coverage only needs one year.
3. Decreasing Term Policies
In the case of decreasing term policies, the individual pays a fixed period monthly premium payments for the duration of the term insurance policy. After that, according to a predetermined schedule, the payable amount as death benefit decreases.
Decreasing term policies are often purchased by individuals together with a mortgage to match the coverage with the declining home loan.
Term life insurance policies can be purchased depending on the individual needs of the customer. After you’ve selected the policy that might suit you the best, it is important to do your research on insurance companies and find one that will give you the best package in terms of coverage amount and monthly premiums.
It is always a good idea to use an independent agency like Spectrum Insurance Group to go over your best options when buying life insurance.
Term Life Insurance Vs. Whole Life Insurance
Depending on individual circumstances, cost term life insurance policy premiums are determined based on the customer’s health, age, and gender. The younger and healthier the consumer, the lower the monthly premiums, even for a policy with a large face value. Since such individuals are less likely to die during the given term, the insurance company can safely agree to a large payout for smaller monthly premiums.
While a whole life insurance policy or permanent life insurance policy for a similar payout might have a considerable difference in monthly premiums, the benefits of whole life (permanent policy) insurance outweigh those of term life insurance.
When you purchase a whole life insurance policy, the premiums are decided based on relevant factors such as the age, gender, health, hobbies, driving history, and family history, etc., of the customer. These premiums are fixed once the policy is obtained and are payable throughout life. When you buy life insurance you will always want to review your personal finance to determine how much coverage makes the most sense with your financial planning.
The most significant advantage of whole life insurance is its non-taxable cash component (cash value account), alongside the coverage amount. The policyholder can withdraw money that makes up the cash component during their lifetime. The cash value, which increases over time, can also be invested or borrowed. It is important to remember that these withdrawals, along with policy loans, chip away at the policy’s cash value. Not only that, repeated withdrawals by the policyholder in his or her lifetime can even wipe out the death benefit altogether.
While there are whole life insurance policies that deduct the amount withdrawn from the cash component or death benefit, others subtract an amount greater than what was withdrawn. If and when the policyholder passes away, the remaining death benefit is paid to the beneficiaries named by the customer. The insured can also choose to set aside an amount to be spent on their funeral and even be given to a particular funeral home. The remaining amount can be used to settle any outstanding debts, mortgage payments, loans, or hospital bills, etc.
While both term and permanent life insurance options have their advantages and disadvantages and offer financial security, term life insurance might not be a good choice if you are looking for payout in the distant future, as your policy may expire by then.
A whole life insurance plan can also be helpful if you need money at any point in your life. You can withdraw an amount without significantly denting your death benefit, as it will accumulate over time. However, the choice largely depends on individual circumstances, and a policy that may be suitable for one person may be entirely unsuitable for another.
It is very important to use an independent insurance agent that will help you with the underwriting process and financial plan.
Spectrum Insurance Group is made up of professional life insurance agents who are licensed in all 50 states and the District of Columbia. As principal licensed life insurance agent Bennett Bier has helped 1000’s of people purchase life insurance online & over the phone. During his career he has become the go to expert for securing hard to place term and permanent life insurance policies for clients across the nation. With his wealth of knowledge of each life insurance carrier’s products and underwriting he provides honest answers and advice to every client. Bennett Bier and his team will work tirelessly to successfully secure the coverage your family deserves.
All content on this site has been written by life insurance experts & licensed life insurance agents.