term life insurance

Budget Rates Life Insurance

Term Versus Whole Life Insurance

There really is no "raging debate", as some might lead you to believe, between term insurance and whole life insurance. They are meant for different purposes.

Term insurance

Term insurance is meant to provide income replacement for a period of time of your choosing. If you have young children, this might be until they have graduated from college, or are otherwise able to provide for themselves. In this case, you would probably want to consider a large amount of coverage for 20 years. For instance, if you need to replace $50,000 per year, you would probably want a policy for $1,000,000.

If you are planning for retirement, you should be in a position to not need life insurance at that time. Rather, your beneficiaries will have access to your estate for their needs. But, you certainly need coverage from now until then, in case you die prematurely. So, if you are in your forties, you would want a 20 year term policy. Similarly you would get a 30 year term policy if you are in your thirties.

Whole Life insurance

Whole life insurance is just what it sounds like: insurance for your whole life. The purpose is to ensure that you have a policy in force, no matter when you might die: next year or in 50 years. Why would you want this? There are several reasons. The most common is for final expenses, e.g. burial and winding up of your estate. Only a small policy is required for this, certainly less than $20,000.

Another common reason to guarantee a policy is in force at your death is estate planning. This is only needed for those with a multi-million dollare estate. The life insurance policy is to provide the money needed to pay the estate taxes. This way, your heirs do not need to pay the estate taxes out of the estate. Rather, the full amount of your estate is available to them.

Additionally, some people would like to leave a gift for their children or grandchildren. If they can afford the premiums, there is no better way to do this than through whole life insurance. If you try to use term insurance for this purpose, you might outlive your coverage! Don't try to guess how long you will live: that's why they call it insurance.

A Final Note

A variant of whole life insurance, called universal life insurance is sometimes used by wealthy people for investment purposes. But this is a highly specialized use and should only be considered in consultation with a financial planner.

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