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e insurance steps in and covers any financial gaps left by your passing. These gaps might include your mortgage payments, child's private school tuition, and health care expenses. They can include your credit card balances and even your funeral arrangements. Lacking coverage, your spouse and family might find themselves without the financial resources necessary to meet their needs. The question is, which type of policy is better for your circumstances: term life insurance or whole life?
Each person's financial plan is unique. For that reason, it's impossible to say that one type of life insurance coverage is always superior to the other. With that in mind, we'll provide an overview of term and whole life, including the strengths and weaknesses of each product. That way, you'll be able to make an objective decision based on your situation.
Term And Whole Life In A Nutshell
While there are several nuances that are dissimilar between term life insurance and whole life, all spring from one overriding difference: a forced savings option. Term life is a temporary policy that pays a cash value upon the policyholder's death. Often [link widoczny dla zalogowanych], the policy is renewable each year with gradually rising premiums. Other times, the contract "levels" the premiums for a defined period (e.g. 5, 10, 20 years, />
Whole life insurance blends a cash payout with a forced savings option. This latter feature is often promoted as an investment vehicle. The value of this option is based on a basket of underlying securities, which can include bonds, stocks, and other instruments. Over time, the value of the investment portion rises, allowing you to borrow against it.
The Problem With The Investment Option
Initially [link widoczny dla zalogowanych], the investment feature (or forced savings option) seems attractive. A portion of your premiums is automatically allocated toward the investment piece, which rises in value. However, the rate of return most policyholders realize is rarely, if ever, competitive with alternative investment vehicles. A low-end mutual fund will usually outperform the basket of securities underlying the whole life contract.
Equally troubling is the fact that this isn't usually clear to the owner of the policy. This happens for two reasons. First [link widoczny dla zalogowanych], it is nearly impossible to determine the percentage of your premiums that is allocated to the investment portion. Second, lofty fees and commissions can obfuscate the matter further. They're often equal to the aggregate premium you'll pay during the first year.
This does not indicate that full life assurance is always a poor choice. There are times when such a policy may be appropriate.
When A Whole Life Policy Makes Sense
One of the reasons many people choose whole life over term insurance is because the former does not require you to submit to a medical examination. That should raise a warning flag. The insurer is willing to abandon caution and extend coverage to a person who may have an existing medical condition. The reason they're willing to do so is because there is a significant amount of profit packaged into the policy. That means you'll pay more for the coverage.
Whole life can also be appropriate for those with substantial wealth who carry the contract for decades. The cash value of the investment portion combined with the payout upon death can be used to settle their estate taxes.
Should You Switch From Whole Life To Term?
Suppose you already have a whole life policy and are now wondering whether term insurance is more appropriate for you and your family. Should you switch? It depends. There are two important factors to consider.
First, you'll need to consider your policy's cash value (it's often called a surrender value). This is the amount your insurer will pay you if you decide to terminate your contract prior to its maturity. After compensating service costs and commissions the cash value is negligible for the first ten years of