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Should I choose whole life insurance or term life insurance?

Sep 19, 2012, 9:36 a.m.
Sometimes it's hard to know whether whole life insurance is better than term life insurance, or vice versa.

The older we get, the more important life cover insurance becomes. The last thing anyone wants to envision is their remaining spouse or other family members suffering financial hardships as a result of their death. If this is the kind of thing that keeps you up at night, you're not alone. Fortunately, you've got options. The trouble is, sometimes it's hard to know whether whole life insurance is better than term life insurance, or vice versa. Here's a breakdown on how both of them work, and the differences between them.

Term life insurance -- Defined

In a nutshell, term life insurance is a policy that covers you for a specific period of time. You can set your insurance policy term at short intervals or longer ones, the most common being 10, 20 and 30 years. When an insured person dies during the term of their term life insurance policy, the policy pays out the full face value regardless of how long that policy has been active. For example, you could start paying into a term life insurance policy of half a million dollars for only a few months and if the worst happens and you pass away, your beneficiaries get the entire half million. Term life insurance is less expensive than whole life insurance, but there is one major drawback. If you become sick during the period of your term life coverage and your time comes up for renewal, the company may look at your existing health and deny you extended coverage.

Whole life insurance -- Defined

Where whole life insurance differs from term life cover insurance is that your period of coverage lasts your entire life, and not for a defined period of time. With whole life insurance, your money is also invested and you can earn a return from this investment. This is attractive to many people who are interested in investing their premiums as opposed to throwing them down a bottomless pit. While the insurance aspect can seem appealing, and the fact that you never have to renew or re-qualify for coverage may make whole life an attractive option, there are some drawbacks. One of the biggest is cost. Whole life insurance costs far more than term life and that cost is often the deciding factor in people opting for term life.

Exploring your term versus whole life insurance options

A lot of people argue that whole life insurance is obviously a better choice because it allows you to invest your premiums. With term life insurance, there are no investment options and if you outlive the length of your policy, there's no return at the end of that time. But by using your investment smarts, there is a way you can sign for term life insurance and still see an investment return. It's simple: just take the monthly cost you're saving on the far less expensive term life premiums and invest that.

Life insurance is something that few people like to think about. Sometimes reading over the terms can seem a little dark and morbid. But if you want to ensure that your survivors are well taken care of in the event of your death, it's a topic that you shouldn't put off until it's too late to address.

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