There are several forms of life insurance available, however the two main forms of life insurance are whole life and term life insurance. (It's a good idea to learn about universal and variable, which are variations of whole life insurance, but this article will focus on the 2 basic insurance plans.) So what's the difference between the two? One is often referred to as "pure insurance" (term life), and the other is referred to as "permanent insurance" (whole life).
With term insurance, you're covered only during the life of the policy, as long as you are paying the premiums. Many term policies are often renewable, meaning that you can reinstate your coverage for a longer period before your term ends. To further explain, let's say that you are a healthy 35 year old man, and you purchase a 30 year term policy for $50.00 a month. The company agrees that if you should pass away within the next 30 years they will pay your family a $100,000 death benefit. If your term is renewable, then before your 65th birthday, you would use the same $50.00 that you are used to paying, and renew your term for a new death benefit of $20,000.In recent years new term products have been introduced, that will not only give you "pure coverage" but will also allow you to build a cash value within your policy.
There are several forms of term insurance:
Level term -- you pay a fixed premium for up to 30 years. This can be a good deal, since it protects you against the effects of inflation and unexpected changes in your health that would warrant higher premiums.
Annual renewable term -- gives you the option of renewing your policy regularly, but at increasing premium rates. Typically these policy's are sent to consumers through the mail with phrases such as "start your insurance for only $1.00."
Decreasing term -- features a steadily decreasing death benefit. These policies are often marketed as "mortgage insurance." This type of policy might seem undesirable, but it can be sensible for many people. You may need a bigger benefit when you're a young breadwinner with a family to support than when you're a retiree with grown children and a nice nest egg.
Whole life insurance, is designed to cover you for your entire life. These policies charge you a fixed premium each year, one that's typically higher than term insurance. The advantage touted by insurance companies for whole life insurance is that, while part of the premium covers what term insurance would cost, the surplus resides in an account that pays interest and accumulates a cash value. Accumulation periods vary from insurer to insurer, however, most policies don't start accruing any cash value until the 3rd of 5th year. It is also important to remember that your "cash value" does not grow quickly, and you if you take a loan against your policy you will have to pay the loan back in addition to withdrawal fees, and interest. If you cannot pay the loan back (with the accrued interest) the monies that you borrowed will be deducted from the policies death benefit. In simple terms, you are essentially purchasing "pure insurance" with a savings account attached; the only difference is that your "savings account" can only be accessed via loans if you want your death benefit to remain to the same.
One major advantage to whole life policies is that you do not have to pay for your "whole life" as people often believe. In fact, whole life policies have an added benefit called REDUCED PAID UP. Reduced Paid Up Life Insurance also the insured to remain covered with life insurance without having to pay any additional premiums (monthly payments); however, the face value (death benefit) of the original policy is reduced. For example, if you purchase a $20,000 whole life policy and pay your premiums for 20 years, you can call the insurance company and ask them to give you a reduced paid up policy. The amount of "paid up" insurance will vary depending upon the carrier, premiums paid, and age of the insured.
Whole life policy with term rider. In our opinion this is is the best of both worlds! So many times we see people that have purchased a term life insurance policy end up with no insurance, and the inability to purchase insurance because they failed to "invest the rest" of the money that they were not spending on whole life insurance. A small whole life policy of $20,000 or less with a 20 year term rider will allow you to maximize coverage for the next 20 years, and after the 20 year period you will have a reduced paid up burial policy that won't expire until your reach age 100! The best part about this type of coverage? You won't have to make anymore payments, and you will STILL HAVE INSURANCE in the form of a reduced paid up policy! Typically the cost difference between a $100,000 30 year term policy, and a $20,000 whole life policy with a 20 year $80,000 term rider is less than $10 a month. Call us today to see what the cost difference for you would be.
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