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Should I buy term life or whole life insurance?

The options overwhelm many people. How do you know if you need term life or whole life? Most people do not want to think about death. It is scary and often sad, but who will take care of your loved ones or final expenses. The truth is everyone needs life insurance and you want to choose the best option for your budget and family.

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Some people are under the impression that the Social Security death benefit will cover funeral expenses. The reality is the death benefit only pays out $250 and the average funeral can cost over $6000. This leaves a huge financial burden.

In addition to funeral costs, your loved ones will be left with other bills to manage. Any mortgages or loans you have will need to be settled. The day-to-day living expenses your income provided for will also need to be taken care of. If you have children, you may want to provide for their college expenses in the event of your death.

What is term life insurance?

The simplest answer is it is insurance that covers a specific amount of time or term. You will pay monthly or annual premiums for coverage. At the end of the term, the coverage expires. These types of policies are usually written for 10-30 years, but companies may offer a five-year option as well. Term life insurance coverage is ideal for people with tighter budgets due to its affordable premiums.

Some companies offer automatic renewal or the ability to switch to a whole life policy at the end of the term. Your premiums are only locked for the term so they may go up if you renew. Some options which may be presented to you include:

Annual renewable term insurance is renewed every year up to a specific age. You should expect your rates to go up every year though and note that your age and health may be re-assessed every year to calculate these rates.

Renewable term insurance is similar to annual renewable except you can choose longer terms. This policy also guarantees that the policy can be renewed regardless of your health. Remember longer renewal terms carry more risk for the insurance company so rates may be higher than an annual renewal.

Level premium term insurance will give a premium guaranteed to stay the same for the entire term of your policy. Most companies calculate the rates they would get from an annual policy and find the average. This means your rate starting out may be higher but over the life of the policy, it would even out because it would not go up.

Decreasing term insurance is a policy where the benefits go down over time. This type of policy is good if you want to have extra insurance to pay off a mortgage or large loan. Premiums and benefits go down as the loan is paid off.

Convertible term insurance means that you can convert your policy into another type of life insurance policy later. You can change your policy if your needs change and these types of policies tend to have a higher cost.

What is whole life insurance?

Whole life insurance keeps its death benefits for your entire lifetime. Unlike term insurance, the policy never expires as long as you continue to pay your premiums. These policies have a higher premium because once you are locked in the never go up regardless of health or age. Whole life insurance is offered in different types of packages. There is traditional, variable, and universal.

Traditional whole life comes with guaranteed death benefits and cash value. This means you know exactly what you can expect for the life of the policy. Traditional whole life insurance can be broken into two categories though, participating and non-participating.

Participating policies pay dividends based on investment earnings. Your money is invested in the insurance company to try to increase your earnings. Non-participating policies are not invested so there are no dividends earned. The risk of loss is also lower in a bad economy.

Other things to look at in your policy are the different premium options. There is a level premium, which means you will pay the same premium for your entire life. This premium cannot be changed regardless of your health.

You can opt for limited payment, which means you pay higher premiums for a set amount of time and then you never have to pay again. You retain your coverage for life and some life insurance companies even offer a onetime lump sum payment option.

Indeterminate premium whole life insurance policies have adjustable rates. These rates are based on investment earnings, expenses and the death rate with policies having a set maximum premium.

Variable whole life calculates your death benefits based on investments managed by the company and these policies do offer a chance to earn greater benefits than a traditional policy but can also carry a higher risk.

There are two options for premium payments with a variable policy. Scheduled premiums, which are due at a preset time period for specific amount and flexible, which allows you to change date or amount if necessary.

Universal whole life insurance has fixed death benefits, but allows you to have flexibility over how much of a premium you pay and when. There are set minimums that you must pay to keep the policy active and the cash value is based on the amount of premiums paid and current interest rates.

How do I choose the right one for me?

Deciding which type of life insurance you need depends entirely on your unique needs. What is good for one person may not work for another. You will need to determine how much insurance you need. Most companies recommend eight to ten times your annual income but you also want to consider your debts and families future needs.

Your budget is also a big factor in choosing insurance. How much can you afford to spend? Term life has lower premiums, but whole life never expires and builds cash value. Finally, age and health play a big factor in the life insurance choices and premiums will depend on your unique profile.

You should always consult an insurance specialist and a financial planner to determine your exact needs. Both term life and whole insurance are products almost everyone should have but only a discussion with a licensed life insurance agent can really determine which product is best for you.

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