Term Versus Whole Life Insurance
Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.
Term Versus Whole Life Insurance
Many people are not sure what Term versus Whole Life Insurance will mean for their future. Therefore we try to explain what to expect.
Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Level term products are the most popular plans purchased today. The level term can be from 5 years to 30 years. The premium and death benefit are designed to stay level during the term of the contract. The premiums can be either guaranteed* or not guaranteed.
When purchasing a level term life insurance policy be sure you are aware of the guaranteed* premium period. Once you have been approved and placed the policy in force with the first payment, the insurance company is obligated to keep the policy in force as long as you keep paying the premiums. You are not obligated to pay, but once you stop paying, the policy will lapse after usually a 30 day grace period.
Some term insurance policies can be renewed when you reach the end of a specific period which can be from one to 30 years. The premium rates increase at each renewal date. Most policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.
Advantages and Disadvantages of Term Insurance
- Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.
- It’s good for covering specific needs that will disappear in time, such as mortgages or car loans.
- The new 20 and 30 year products can provide coverage as long as most people might need life insurance.
- Premiums increase as you grow older, after the term selected expires, providing it renews past that term.
- Coverage may terminate at the end of the term or may become too expensive to continue.
- Generally, the policy doesn’t offer cash value or paid-up insurance.
Questions to Consider When Considering a Term Policy
- How long can I keep this policy? If you want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal of the contract.
- When will my premiums increase? Annually? Or after a longer period of time, such as five or 10, 15, 20, 30 or even 40 years?
- Can I convert to a permanent policy? Some policies allow you to convert the policy to permanent insurance without a medical exam, regardless of your physical condition at the time of the conversion. These policies are known as “convertible term.”
Here are a few tips to keep in mind when purchasing a life insurance policy:
Take your time. On the other hand, don’t put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.
After you have purchased an insurance policy, keep in mind that you may have a “free-look” period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify the agent or the company of any errors or missing information.
Review your policy periodically or when your situation changes to be sure your coverage is adequate.
Here are some additional items to consider when you are selecting a term or permanent policy:
What happens if I fail to make the required payments?
If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. In a term policy at the end of the grace period if you do not make a payment the policy will lapse. In a permanent policy, the company can, with your authorization, draw from a permanent policy’s cash surrender value to keep that policy in force as long as there is sufficient cash surrender value. In some flexible premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values.
What if I become disabled?
Provisions or riders that provide additional benefits can be added to a policy. One such rider is a “waiver of premium”** for disability. With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability.
Are other riders available?
- “Accidental death benefit”, provides for an additional benefit in case of death as a result of an accident. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
- “Accelerated benefits”, also known as “living benefits.” This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home. This rider, if available, may require additional premium. Availability and specifics varies by carrier and state.
- “Child rider”, provides insurance for all your children, usually ranges from $1,000 to $20,000 of death benefit. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
When will the policy be in effect?If you decide to purchase the policy, find out when the insurance becomes effective. This could be different from the date the company issues the policy.
*Guarantees are based on the claims paying ability of the issuing insurance company.
** Availability, specifics, and costs of these riders vary by carrier and state
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