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How to choose the right life insurance: Term Life or Whole Life?

whole life insurance vs. term life insurance
whole life insurance vs. term life insurance

How to choose the right life insurance is an issue many Americans face. The decision to obtain life insurance may seem simple; until you get into the multiple types of life insurance.

We’re going to take a quick look at the two most common types of life insurance, whole and term life.

Key differences between whole life and term life insurance

Term Life Insurance

  • Coverage. Provides coverage for a specific period of time (e.g., 10, 20, or 30 years). If you die within the term, your beneficiaries receive the death benefit. If you outlive the term, the policy expires unless it’s renewable or convertible.
  • Premiums. Relatively inexpensive, especially for younger and healthier individuals, as it’s pure protection without savings features.
  • Cash Value. No cash value component.
  • Best for. Those seeking affordable coverage for temporary needs like covering a mortgage, providing for children’s education, or income replacement during working years.

Whole Life Insurance

  • Coverage. Provides lifetime coverage as long as premiums are paid.
  • Premiums. Significantly more expensive than term life insurance.
  • Cash Value. Includes a savings component that grows on a tax-deferred basis. You can borrow against or withdraw from the cash value.
  • Best for. Those seeking lifetime coverage, potential for building cash value, want a savings element, and additional financial options like accessing funds and borrowing against the policy while you’re still alive.

Here’s a table summarizing the differences

How to choose between whole life and term life insurance

Choosing the right life insurance involves understanding your needs and comparing different policies. Here’s a breakdown of the process:

Consider your needs

  • Coverage amount. How much money will your dependents need after you’re gone? This should cover outstanding debts, living expenses, and future goals like college for children.
  • Policy type. Term life insurance provides coverage for a specific period, while permanent life insurance offers lifelong coverage and a cash value component that grows over time.

Research different life insurance companies

  • Financial strength. Look for companies with strong ratings from agencies like AM Best to ensure they can pay out claims in the future.
  • Customer service. Check complaint indexes to see how companies handle customer issues.

Get quotes and compare plans

Don’t just go with the cheapest option. Consider factors like coverage amount, policy features, and the company’s reputation.

The case for whole life insurance

Whole life insurance provides guaranteed insurance protection for the entire life of the insured. There is a “cash value” component to whole life insurance that grows tax deferred at a contractually guaranteed amount until the contract is surrendered.

Insurance premiums with whole life insurance are usually level for the life of the insured while the death benefit is guaranteed for the insured’s lifetime.

Whole life insurance can be more costly than term life insurance because you are paying for both the insurance and the investment portion of the policy.

You may have to wait several years in order to get a decent return on investment for whole life policies; but for some consumers, it may be worth it. For instance, you may be able to borrow against the cash value of your insurance policy. This may be a low cost option for consumers with less than perfect credit. It is your money and there is no qualifying for the loan.

Emergencies may occur and it’s always good to have a source of money that does not include credit score qualifying at a lender. Whole life has a cash-value that can be borrowed against.

The case for term life insurance

Term life insurance provides coverage for a set duration limit on the coverage period. With a term life policy the benefit will only be provided if the death occurs within a specific time period.

Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end.

A term life policy does not provide any returns; like a whole life policy, beyond the stated benefit. Because there is no savings component, premiums for term life insurance can be a lot cheaper than whole life insurance.

But term life insurance is typically only cheaper for consumers in good health; and, without pre-existing health conditions. Consumers with pre-existing conditions may find it more cost efficient to go with whole life insurance policies.

How credit scores impact life insurance approval

It’s important to know how credit scores work because they can play a role in getting approved for life insurance and can affect your premiums, but the impact varies:

More Impact on Whole Life: Whole life insurance policies are generally more expensive and considered a bigger financial commitment. Insurance companies may use your credit history as a factor in determining your risk profile and therefore, your premiums. Better credit could lead to lower premiums.

Lesser Impact on Term Life: Most term life insurance companies do not heavily rely on your credit score for approval. However, they might conduct a credit check in specific situations, such as when you’re applying for a high coverage amount or if other factors in your application raise concerns.

Why do life insurance companies consider credit history?

Insurers view your credit history as a reflection of your overall financial responsibility. Factors like late payments, collection accounts, or bankruptcies can indicate potential financial instability, which insurers may associate with an increased risk of missing premium payments.

Credit scores are not the only factor

Your credit score is just one of the factors considered in life insurance underwriting. Your health, age, lifestyle, and family medical history play a much larger role. However, improving your credit score can potentially make you eligible for better insurance rates on both term and whole life policies.

The good news is that not all companies run a credit inquiry. In fact, some insurance companies don’t rely on credit scores at all.

If you’re concerned about your credit score affecting your insurance options, consider:

  • Comparing different insurance companies and their policies on credit checks.
  • Focus on improving your credit score by paying bills on time and reducing amounts owed to improve your creditworthiness.
  • Talking to a financial advisor or insurance agent can help you understand the specific requirements of different insurers and find policies that fit your situation.

Final takeaway

Everyone should consider life insurance. Whether it is used to replace your income, pay off a debt, pay for final expenses or establish a legacy, there are many compelling reasons to purchase life insurance.

The first step is finding a company with high ratings from independent agencies like A.M. Best, Moody’s or Standard & Poor’s. The last thing you want to worry about is whether you are dealing with a reputable insurance company that will be around for years to come.

You should also look for a company that offers good advice to your beneficiaries. It’s crucial that your beneficiaries are provided with certified financial planners after your death to responsibly manage money and other property left to them. Your loved ones need a dedicated team specializing in survivorship needs.

Lastly, it’s highly recommended that you consult with a financial advisor or insurance professional to help you determine the best type of life insurance for your specific circumstances.

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