They say term life insurance — a cheaper life insurance option that does not contain an investment component — is a better fit for most people. When you pay premiums to a term life policy, the payment has two basic parts — the first covers the cost of insurance and the second pays administrative costs. The account grows at a fixed rate, sort of like a savings account. Whole life cash accounts grow tax-deferred.
You'd have to pay tax only if you withdraw more cash than you paid in. Because of this, money can grow more quickly than it might outside of your account.
All of your interest stays in the account, earning even more interest in future years. You can then use that cash value in retirement to supplement your income. Permanent life insurance policies let you borrow against the value in your cash account without withdrawing it or needing to pay taxes.
We asked certified financial planners Steven Elwell, Damon Gonzalez and Brian McCann for their opinions on whether whole life insurance is a good investment.
Steven Elwell , Level Financial Advisors, Amherst, New York: While everyone can consider a whole life insurance policy as a part of their retirement savings strategy, for the vast majority of people there will be other, more attractive options to use first. Brian McCann , Bootstrap Capital, San Jose, California: There are some very important reasons to have a whole life policy, such as estate tax issues, care for a disabled child or dependent, and liquidity for closely held businesses.
If you need a whole life policy for such a reason, you may also be able to benefit from the cash value that builds up in the policy for retirement.
The information on this site does not modify any insurance policy terms in any way. Life insurance can serve as a valuable financial vehicle to care for your loved ones after your death.
In addition to protecting your loved ones financially, whole life insurance can serve as a useful investment vehicle. It can also serve as an investment vehicle.
This amount is called the cash value account. You can borrow against this money during your life, use it to pay your premiums, and even withdraw it from your account. Is whole life insurance worth it? Is it a good investment? The simple answer is that it depends.
Before purchasing a whole life insurance policy, you may want to look carefully at your financial goals and think about what the cash value portion of the policy could help you achieve.
Term life insurance may be a better option for people who just want a life insurance policy that pays a death benefit and nothing more. Term life insurance is typically less expensive, easier to get and protects you for a term of years that you choose.
The money you save on premiums can be invested elsewhere as you see fit, taking into account your comfort level with risk. Whole life insurance, on the other hand, typically costs three to four times more than term life insurance. Whole life insurance may not be the right choice for everyone. The cost makes it prohibitive for many, and those looking for an aggressive investment vehicle could be disappointed in the returns they get from their whole life policy.
You may be wondering about the differences between term and whole life insurance. Term life insurance is a great option for those who want to leave a death benefit to their heirs without a cash value account.
Some folks may see the lack of a cash value account as a drawback. Like whole life, universal life is a type of permanent insurance that stays in force as long as you pay the premium. There are a couple of different types of universal life, based on how the cash value is allocated.
Indexed universal life is tied to a market index and will fluctuate accordingly. If you buy through work, coverage can be up to a termination age Lifetime coverage as long as payments are made Health exam required In most cases, but depends on the amount taken out Yes Cash value No Yes — accumulates over time Eligible for company dividends No Yes — depending on the company Ability to withdraw cash value during life of the policy No cash value Yes — withdrawals and loans are allowed but if unrepaid, this will diminish the death benefit Guaranteed death benefit Yes Yes Used for estate planning Not typically Yes Accelerated death benefit Yes Yes.
How good is your health? What are the ages of your children? Are you concerned about long-term health expenses and serious illness? What is the amount of your mortgage and other debts?
What are your plans for retirement? What college plans do you have for your children? How will you pay for funeral expenses? Are you concerned about estate planning and tax ramifications? Are you setting up a trust as part of your will? Do you want to leave part of your estate to charity? Do you have existing life insurance, perhaps through your employer? While term insurance is great for temporary needs, whole life insurance policies are a long-term solution.
Both types of coverage can work together. While a whole life policy, such as burial insurance , can ensure that your burial costs and other final expenses are covered. Term life insurance is temporary, when the term ends so does the coverage. You can get term life insurance for a year or up to 30 years.
When the policy term ends, coverage ends and must be reapplied for or converted to whole life before the expiration date. There is no need to re-qualify after a term ends so any new health issues will not affect the coverage or premiums. Whole life insurance is the only type of life insurance that builds cash value.
Whole life insurance builds cash value and costs a little more, stays in force for the life of the insured as long as the premiums are paid Why Do You Need Term or Whole Life Insurance? Your circumstances and needs will determine which type of life insurance is right for you. Term Life vs. Whole Life: Quick Comparison There are some significant differences in term life insurance and whole life insurance.
Table of Contents. What Is Term Life Insurance? Fortunately, some term insurance policies are more flexible: Renewable term — A renewable policy typically allows you to renew for a set period of time when the policy expires. Convertible term — A convertible policy typically allows you to convert the insurance to a different plan.
FAQs Here are the answers to some of the most frequently asked questions about term life and whole life insurance. Should I convert my term life to whole life?
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