Two of the most common types of life insurance are term and whole life. Life insurance benefits your loved ones when the inevitable happens. While it can be tough to think about your own death, choosing the right term or whole life insurance policy can protect your household and allow you to leave a legacy to those you care about the most.<\/p>
Whole life is a form of permanent life insurance that lasts as long as you live (assuming you pay the policy\u2019s premiums). It also includes a cash value account\u2014a type of savings account that grows tax-free over time and that you can withdraw from or borrow against while you are alive. <\/p>
Term life insurance, on the other hand, lasts only for a certain number of years (the term) and does not accrue any cash value. If you\u2019re not sure where to buy these policies, you can select either a term or a whole life insurance policy from one of the best life insurance companies.<\/p>
Term life insurance provides a death benefit that pays the beneficiaries of the policyholder throughout a specified period of time. Once the term expires, the policyholder can either renew it for another term, possibly convert the policy to permanent coverage, or allow the term life insurance policy to lapse.<\/p>
When you buy a term life insurance policy, the insurance company determines the premium based on the policy\u2019s value (the payout amount) and such factors as your age, gender, and health. Other considerations affecting rates include the company\u2019s business expenses, how much it earns from its investments, and mortality rates for each age.<\/p>
In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, family history, and similar information.<\/p>
If you die during the policy term, the insurer will pay the policy\u2019s face value to your beneficiaries. This cash benefit \u2014 which is not typically taxable \u2014 may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, mortgage debt, and other expenses. However, beneficiaries are not required to use the insurance proceeds to settle the deceased\u2019s debts.<\/p>
If the policy expires before your death or you live beyond the policy term, there is no payout. You may be able to renew a term policy at expiration, but the premiums will be recalculated based on your age at the time of renewal.<\/p>
There are several types of term life insurance. The best option will depend on your individual circumstances. Generally, most companies offer terms ranging from 10 to 30 years, although a few offer 35- and 40-year terms.<\/p>
Level-premium insurance has a fixed monthly payment for the life of the policy. Most term life insurance has a level premium, and it\u2019s the type we\u2019ve been referring to in most of this article. As we mentioned before, this type of policy generally provides coverage for a period ranging from 10 to 30 years. The death benefit is also fixed.<\/p>
Because actuaries must account for the increasing costs of insurance over the life of the policy\u2019s effectiveness, the level premium is comparatively higher than yearly renewable term life insurance.<\/p>
Yearly renewable term (YRT) policies are one-year policies that can be renewed each year without providing evidence of insurability.<\/p>
The premiums rise from year to year as the insured person ages. Thus, the premiums can become prohibitively expensive as the policyholder ages. But they may be a good option for someone who needs temporary insurance.<\/p>
These policies have a death benefit that declines each year according to a predetermined schedule. The policyholder pays a fixed-level premium for the duration of the policy.<\/p>
Decreasing term policies are often used in concert with a mortgage, with the policyholder matching the payout of the insurance to the declining principal of the home loan.<\/p>
Whole life insurance guarantees payment of a\u00a0death benefit\u00a0to beneficiaries in exchange for level, regularly-due premium payments. The policy includes a savings portion, called the \u201ccash value,\u201d alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis.\u00a0Growing cash value is an essential component of whole life insurance.<\/p>
To build cash value, a policyholder can often remit payments greater than the scheduled premium to purchase extra coverage (known as paid-up additions or PUA). Policy dividends can also be reinvested into the cash value and earn interest. Over time, the dividends and interest earned on the policy’s cash value will provide a positive return to investors, growing larger than the total amount of premiums paid into the policy. <\/p>
The cash value offers a living benefit to the policyholder, meaning the policyholder can access it while the insured is still alive. To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Withdrawals are tax-free up to the value of the total premiums paid.<\/p>
Interest is charged on policy loans with rates varying per insurer, but the rates are generally lower than you\u2019d get with a personal loan or home equity loan.<\/p>
However, withdrawals and unpaid loans also reduce the cash value of the policy. Depending on the policy type and the size of its remaining cash value, a withdrawal could chip away at the death benefit or even wipe it out entirely.<\/p>
A cash-value life insurance policy is similar to a retirement savings account, in that it allows investments to accumulate tax-deferred interest.<\/p>
Part of each premium payment goes toward the policy’s cash value, which can be withdrawn or borrowed against later in life. The cash value of a life insurance policy grows quickly when the insured is young. But because more of the premium is needed to cover the cost of insurance as the insured ages, the cash value grows more slowly as they get older, due to the higher risks associated with age.<\/p>
The insured can access their policy\u2019s cash value by borrowing against it the cash value, or by withdrawing money in a partial cash surrender. Surrenders will reduce the final death benefit of your policy. <\/p>
You can also use the cash value to cover your monthly premium payments instead of paying out of pocket. Or you can surrender the whole policy to receive the entire available cash value (minus any surrender fees). However, the policy will be terminated and the death benefit is no longer be available to your beneficiaries.<\/p>
The dollar amount of the death benefit is typically specified in the policy contract. But it can be changed in some instances. <\/p>
Some policies are eligible for dividend payments, and the policyholder may elect to use the dividends to buy paid-up additions to the policy, which will increase the amount paid at the time of death.<\/p>
Death proceeds are non-taxable to the beneficiary.<\/p>
The death benefit can also be affected by certain policy provisions or events. As mentioned before, unpaid policy loans (including accrued interest) reduce the death benefit dollar for dollar.<\/p>
Alternatively, many insurers offer voluntary riders\u2014for a fee\u2014that secure or guarantee coverage, including the stated death benefit. Two of the most common such riders are the accidental death benefit and waiver of premium riders, which protect the death benefit if the insured becomes disabled or critically or terminally ill and is unable to remit premiums due.<\/p>
Beneficiaries may also have decisions to make about how the death benefit is paid. The default option is to receive a lump-sum payment. But some policies also allow beneficiaries to choose to get the death benefit in installments or to convert it to an annuity. An annuity may pay out for a set amount of time until the death benefit is exhausted, or it could pay out for the life of the beneficiary. <\/p>
The death benefit continues to earn interest until it is paid, and that interest may be taxable.<\/p>
It\u2019s impossible to make a direct cost comparison of term life vs. whole life insurance because the policy features are so different. If you\u2019re looking for a long stretch of coverage with term life, look at 30-year policies. Banner Life (part of Legal & General America) and Protective Life offer 40-year term life, which is currently the longest level term available.<\/p>
Whether you decide to buy term or whole life insurance, your life insurance quotes will be affected by:<\/p>