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Budget Rates Life Insurance |
Term Versus Whole Life Insurance
Term insurance, also called temporary insurance, covers a person against death for a limited time, the term. For example, the term might be until children are grown, or until college is paid for, or until retirement. You pay for the coverage period and at the end of the term the contract, or policy, expires. If no claims are made against the policy during the term, you don't receive any benefits after the policy expires, just like auto or homeowners insurance.
Whole Life insurance,
also called permanent insurance, is permanent and does not expire
(assuming you continue to pay the premiums). It provides coverage
similar to term insurance, but it also provides an investment
vehicle. A portion of the premium goes toward insuring your life
while the other goes toward an investment account. This
investment account can be either an interest bearing account or a
stocks and bonds investment account.
Which is better (our opinion)? Young families with large financial obligations are usually better off with term life insurance. The substantially lower premiums enable them to purchase sufficient coverage to protect against loss of income. Any discretionary investment funds can be placed in other vehicles (mutual funds, money market accounts, etc.) that are likely to generate returns similar to or better than life insurance contracts. Cash value insurance is sometimes purchased by people for tax and estate planning purposes. You should consult with your financial advisor.