Congratulations! You and your significant other have just had a child, and you’re starting to look ahead to the next step in your life. You want to offer your growing family protection, so you’re thinking about buying a life insurance policy. But when you search around online, you see term life insurance and whole life insurance and think: Which one should I get?
You’re doing something important by making the decision to get life insurance. But figuring out whether you need term or whole life insurance (or both) can be tricky. Here’s what you need to know about the two.
Looking to buy a life insurance policy? Call a licensed insurance agent at 1-800-273-8115 or check out uhone.com for more information.
Term life insurance is a life insurance policy that pays cash benefits to help your loved ones in the event of your death. It’s for a set period of years, generally 10 to 20. If you die during that time, your designated beneficiary — say, your significant other — will be paid a lump sum.
Some companies also offer a critical illness rider. This means that if you’re diagnosed with a qualifying illness, you’ll receive a cash benefit according to the terms of your policy. You can use that money however you want, but it’s subtracted from the benefit amount of your term life insurance policy.
In general, the cost of term life insurance depends on your age, overall health, risk factors (for example, whether you smoke), and value of the death benefit, explains Michael Beloff, CFP, founding partner of Belvedere Wealth Partners in Stamford, Connecticut. The rule of thumb, he says, is to buy insurance that’s equal to 20 times your salary to cover your kids from infancy through college.
While anyone can benefit from a term life policy, it makes the most sense to purchase a policy right before you have your first child, says Beloff. You also may want to consider it if you have a partner and are the primary breadwinner, he adds. This way, you can provide some support for them if you die unexpectedly.
If you have kids, it’s also important to purchase term life insurance for the stay-at-home parent, stresses Beloff. However, it’ll require having a policy that’s large enough to pay for childcare for 10 to 15 years, so the person in your family who’s the primary wage earner can continue working, he adds.
As opposed to term life insurance, whole life insurance is a form of permanent life insurance policy that offers lifetime coverage. While all life insurance policies have a death benefit that’s paid to a beneficiary, with permanent life insurance, a portion of your premium (monthly bill) builds a cash value that earns a dividend, explains Beloff. This allows you to make some money on your policy. Some policies also allow you to borrow from the insurance company using the cash value in your life insurance. Like all loans, you’ll repay the insurer with interest.
You’ll pay a certain amount in premiums on a regular basis for a specific death benefit.
Whole life insurance is quite a bit more expensive than term — in some cases, the annual premiums can cost five to 10 times more, says Beloff. The advantage, however, is that it’s lifelong coverage, and both the death benefit and the premium stay the same throughout the course of the policy. The insurance company can do that because it charges a premium that’s higher than what’s needed to pay claims. It then invests that money and uses the income generated to help pay the cost of life insurance for older people.
Whole life insurance may simply be too expensive for some people, notes Beloff. But if you can afford it, it can provide a cushion for loved ones after your death. If you anticipate having expenses down the road, like college tuition, for example, you may have enough value in your whole life policy to pay off some of those bills.
You also may have the option to sell your whole life policy to a life settlement company if you decide you don’t need it anymore — if, for example, your partner dies before you, or your children or other dependents are financially stable. You’ll usually need to be over 65 and have a policy of at least $100,000. You won’t have to pay the premiums anymore, but you won’t get the death benefits.
Thinking of going with a term life insurance plan? Call a licensed insurance agent at 1-800-273-8115 or check out uhone.com for more information.
The Texas Department of Insurance. “Can I sell my life insurance policy?” January 26, 2022. Retrieved from https://www.tdi.texas.gov/tips/can-i-sell-my-life-insurance-policy.html