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Purchasing a life insurance policy provides for your family or other dependents in the event of your death. You pay an unchanging monthly premium in exchange for a guaranteed death benefit, and premium levels depend on many factors, including the age at which you purchase a policy. Although it’s easy to brush off the idea of life insurance early in life when you have no dependents, this is the ideal time to consider getting a policy in place.
When to Purchase a Policy
The younger you are when you get life insurance, the less you’re likely to spend on premiums. Many people purchase policies for their children at the beginning of life to ensure they have coverage and lock in lower payments. Ownership of the policy can be transferred at age 18.
If your parents didn’t set up a policy for you, it’s a good idea to get one as soon as possible. An “ideal” age for obtaining life insurance is under 35. Premiums increase with age, and common health conditions developing later in life can drive prices up more or even prevent you from qualifying. Premiums never increase, so purchasing life insurance when you’re eligible for lower payments means you’ll pay less over the life of the policy.
In addition to age, life stage is the best indicator of how beneficial a policy will be. Regardless of how old you are, if you have a family with young children, other people who depend on you for support or long-term debt someone else would be responsible for if you died, it’s time to determine which type of policy is best for you.
Term Insurance Explained
Term life insurance policies are the most common. With these policies, you pay a premium each month during a set term to secure a death benefit for your beneficiaries. Term lengths differ but generally last between ten and 30 years. Once the term is over, you no longer have coverage.
Benefits from a term insurance policy cover only your dependents and may be expanded by adding riders to your policy. These can help to cover premium payments if you become disabled or provide an accelerated death benefit should you be diagnosed with a terminal illness.
Term insurance premiums remain the same for the entire length of the term. If you choose to renew the policy after the term runs out, premiums are often higher due to factors such as age, health condition and increased overall costs.
Whole Life Insurance: What is It?
Whole life insurance is a type of permanent life insurance providing lifelong coverage. Like term insurance, premiums are fixed and guarantee a payout when you die.
Whole life insurance also includes a feature known as “cash value,” an investment-style type of saving in which a percentage of each premium payment adds value to the policy. The insurance company pays interest on the cash value at a level based on their annual profits. Although the rate is low compared to other forms of savings, you get the assurance of knowing your money is generating returns throughout your lifetime.
Unlike term insurance, in which the death benefit is provided entirely by policy coverage, increasing cash value in a whole life policy decreases the amount covered by insurance. If you have the policy for a long time, the cash value may be enough to provide the entire benefit with no additional coverage at all.
Benefits of Term vs. Whole
If you’re at a stage of life in which your family would need financial help if you died unexpectedly, term insurance is a good choice. You can pick a term length to cover the years during which aid is essential and pay less than you would for a whole life policy. Term insurance can also be canceled before the term expires, and there are usually no additional fees or complex fine print to deal with.
To get the added benefit of a growing cash value, consider a whole life policy. The gains you enjoy with these policies aren’t subject to taxes, and you can borrow against the growing value any time you need extra cash. Both types of insurance provide coverage for common expenses associated with the end of life, including funeral costs, estate settlement and paying off remaining debts.
The type of life insurance you purchase should provide coverage in line with your goals, your needs and the needs of your family or dependents. Don’t wait until your health is poor and you suddenly “need” a policy. Buying young gets you better rates and a chance to accumulate a little extra money for yourself or your family. Be realistic about your needs, and choose a length and type of coverage with features suited to your lifestyle.
When people think of life insurance, they often think of whole life insurance, which is something that you keep paying for until you pass on. Once you die, the assets in the policy are passed on to named beneficiaries. Term life insurance works in a similar but somewhat different manner.
With term life insurance, you set an amount of time, or term, that you want to be covered for. Instead of paying towards a policy until your death, you pay for a set amount of time, such as five, 10, 20 or 30 years. As with standard life insurance policies, if you pass on during the term, your policy will pay out to your beneficiaries.
If you’re still alive at the end of the term, your options are normally to end the policy, renew your policy or convert it to a whole life insurance policy. The cost of your premiums after your term ends and you extend your life insurance will depend on how your initial policy was set up.
What Affects Policy Rates
As with whole life insurance, your policy premiums will depend on factors like your age, health and the amount that you’d like paid out to your beneficiaries. Other factors that determine the cost of term life insurance policies include the length of the term and whether it is renewable. Whether you have a level policy, which is where the premium remains the same throughout the term, will also affect your premiums. Many insurance providers now offer hybrids where a set number of years are level, but premiums can increase after the set time passes.
Another factor that can affect the cost of term life insurance premiums is if someone opts for a policy with a return of premium feature. For many other types of insurance policies, people receive a refund on what they’ve paid in premiums if they never have to use their insurance. This is normally not the case with term life insurance.
Due to demand, some insurers have started making term life insurance policies with return of premium features available. However, the cost of these policies is often significantly higher than policies without them; it is not uncommon for these policies to have premiums that are double those of policies without return of premium features. Additionally, you normally are required to keep the policy for the full term to be able to receive the return of premium payout.
The Benefits of Term Life Insurance
One reason that many individuals opt for term life insurance over whole life insurance is that it is far less expensive than whole life insurance. The reason for this is that whole life insurance will almost always result in a policy payout. However, in a large number of cases, term life insurance policies won’t be paid out because people will live beyond the term.
The cost of premiums for term life insurance is often a fraction of the cost of whole life insurance premiums. For someone in their 20s or 30s, the annual premium for a 30-year term life insurance policy is about 10 to 15 percent of the annual policy premium for whole life insurance. If someone takes out a 20-year term policy, the annual premiums can be less than 10 percent of the premiums for a whole life insurance policy.
This very low cost allows even younger individuals who aren’t making a lot of money to provide a safety net for their family. Even if someone cannot afford whole life insurance, they can often manage to pay for term life insurance. Once someone is older and the term has expired, they can convert their term policy to a whole life policy. Alternatively, many people who are in their 40s or 50s have paid off their home and no longer have children living with them, which allows them to create a financial safety net without an insurance policy.
What is Term Life Insurance?
Term life insurance is generally less expensive than whole life insurance because it only protects you for a specific term. In the event that you die before the coverage term of your term life insurance policy expires, your dependents will receive a payout. There is no other way to get a benefit from a term life insurance policy because you must die in order for the coverage to kick in. This means that a term life insurance policy does not have a cash value at any point.
This type of policy is generally available for a 20-year term. If you are young and in relatively good health, then it is unlikely that your dependents will receive any type of benefit during this period. The premium for your life insurance policy will be based on your age and your health status when you first sign up for insurance. Your policy may have a provision that allows the insurance provider to increase your premium at certain intervals as you age.
Why is a Medical Exam Sometimes Required?
Life insurance providers require medical exams for some insurance policies because they want to be able to tell if the applicant is predisposed to certain serious illnesses, which would increase the likelihood that the insurer would have to pay out a death benefit. Insurance companies work with medical providers to schedule an in-person exam of the applicant and then evaluate the results to determine if they will extend coverage or not.
In general, you will find that policies that require a medical exam are more affordable. This is because the life insurance company gets to assess the risk level of providing insurance to the applicant before extending coverage.
How to Avoid Taking a Medical Exam
A medical exam for life insurance coverage typically involves having your blood pressure taken and some blood drawn for lab analysis. If you are petrified of needles or simply do not want to go through the inconvenience of taking an exam just to get a quote for coverage, you do have options available to you.
If you are offered term life insurance through your employer, this generally means that you will not have to go through a medical exam to get your coverage. While this option may sound convenient, keep in mind that if you do not pass away during the policy term, then there is essentially no benefit that is ever paid out under this type of life insurance policy. This is typically a very inexpensive insurance option for employees.
Another popular option for getting term life insurance coverage without having to take a medical exam is guaranteed issue life insurance. With this option, you will not even be required to offer medical records to the insurance company for review. In essence, you are almost guaranteed coverage from the life insurance company just by sending in your application and paying your premium on time. You will only need to answer a few questions about your lifestyle choices and medical history before you are approved. While this type of life insurance policy will provide some sort of benefit for your dependents in the event of your death during the policy term, it is one of the most expensive options that you can find.
One of the less common ways that you may be able to get a term life insurance policy without a medical exam is through a simplified issue life insurance policy. With this application, the life insurance company will request access to your medical records. In addition, they may also ask you a long list of questions about your medical history to determine if there are any issues that would preclude you from getting coverage. This option is still more expensive than a term life policy obtained through a medical exam, but it does avoid the inconvenience of having blood drawn. Keep in mind that the life insurance company still has the option to deny you coverage with this policy option. This typically happens for applicants who are older or suffer from some pre-existing condition that could shorten their life expectancy.
Nobody wants to think about the implications of purchasing life insurance. However, whether you’re 25 or 65, it is important to consider whether or not your family will be in a stable situation when you are no longer there to care for them.
Deciding whether you need a life insurance policy that covers a set period of time or one that lasts for your entire life can feel daunting. This article will help you better understand the differences between term life and whole life insurance, as well as which you will benefit the most from.
Term Life Insurance
This type of insurance is usually referred to as “pure life insurance” because its purpose is to protect your family in the case of premature death. This type of policy can have a term of anywhere between one year and 30 years, depending on the insurer and various other factors. On average, the typical term life insurance coverage is 20 years, and your premium will remain fixed throughout the full term.
With a term policy, if you die within the covered span of time, your beneficiaries will receive the full benefit of your policy. However, outside of premature death within the covered time period, this type of policy has no other value.
Despite this being the sole purpose of term life insurance, for many people, this is sufficient coverage.
Whole Life Insurance
This type of coverage is also called permanent life insurance, or “perm life.” As you might expect, these policies provide lifelong coverage. They also offer an investment component for additional benefit. This facet of a whole life policy is called the cash value, and its gains are tax-deferred, so you do not pay any additional taxes on the gains while they accrue. The cash value of your policy essentially gives you a line of equity to borrow against, though you can also liquidate the policy for its current cash value. However, if policy loans are not repaid in a timely manner with accrued interest, it will reduce the final benefits of the policy.
Whole life insurance is a more complex policy, but it also offers more potential benefits for both you and your family. Not only is there a cash value and an opportunity to accumulate interest, but there are also certain policies that are eligible for earning yearly dividends.
How to Choose
The first factor to take into consideration is cost. Naturally, because term life is temporary and very specific, it will cost far less than whole life. While this isn’t the only factor, it is still one to take into account. This article from Forbes goes more in-depth about specifics to consider when looking at cost.
Another important thing to consider is your overall circumstances. Things to carefully consider when choosing a policy include:
- Your age
- Your current health situation
- The current state of your will
- Mortgages and other debts
- The future financial needs of your beneficiaries
There are no straight comparisons between term life and whole life insurance because they function so differently. If you are relatively young, healthy and in a stable financial situation, term life is usually sufficient. It is also important to note that most term life policies can be rolled into permanent life policies if you choose.
Ultimately, only you will know what best suits your needs. To help a bit with your decision though, here is a brief overview of who benefits the most from each policy.
Term life is the best choice in the following cases:
- You are only in need of a contingency plan during a set period of time, such as when your children are young or you are saddled with significant debts like a mortgage.
- You are looking for a basic, affordable way to protect your family.
- You are considering whole life insurance but are unable to afford the premiums.
Whole life is the best option for those who:
- Know they need coverage for the rest of their life
- Want to provide the family with a stress-free way to pay off estate taxes
- Have a special needs child
- Want to set up a trust for their heirs
- Want additional assets for the remainder of their life
Remember, whether you are choosing term life or permanent life insurance, this is not a decision to make lightly. Be sure to do your research and speak with a few different insurance agencies to ensure you’re getting the most benefit for the price. Don’t be afraid to ask questions, shop around and speak to a professional.