Ask an Expert: Shopping Life Insurance Policies

Dear Kirk: Life insurance: should I be investing in whole life insurance, or is term life insurance a better financial bet? And why?

Kirk Says: When shopping for life insurance, you’ll face several important decisions. One of the most basic is whether you want term life or whole life coverage. Understanding the benefits and risks of each will help you choose the best policy for your current and future financial needs.

Term Life
With term life, you pay premiums for a certain period, say 20 years, and in exchange, the insurer agrees to pay your beneficiaries a stated benefit if you pass away during that time.

Pros

You’ll receive great value. Term insurance can be purchased in large amounts for relatively small premiums.

You can match terms to needs. Most people purchase term life to provide for their dependents. Once your kids are grown, your mortgage is paid off, and your retirement is nicely funded, you may have little use for a policy.

Cons

The policy is temporary. One of the key benefits of term life is also its biggest risk. If your term expires and you still have life insurance needs, you’ll re-enter the market as an older and potentially less-healthy consumer. That means significantly higher premiums, provided you’re coverable at all.

The benefit may not be paid. Some people chafe at the idea of paying for a benefit their beneficiaries may never receive. If you stay current with your premiums and take care of your health, you’ll receive no reward for outliving your policy.

Whole Life
Whole life insurance provides a death benefit throughout your life. It also includes a cash value component that accrues value over time, allowing you to borrow or withdraw funds as needed.

Pros

Lifetime coverage. A whole life policy covers the rest of your life, not just a stated term. As long as your policy is in force when you pass away, your beneficiaries will receive a death benefit.

You’ll retain access to your money. The premiums you pay for a whole life policy become part of the policy’s cash value. After an introductory period, this cash value becomes available to you through loans or as a surrender value. You can even report the cash value as an asset when applying for a line of credit. Any way you choose to use it – if you choose to use it – the cash value of a whole life policy provides another level of financial security for your family.

You may receive dividends. The insurer may pay dividends to whole life policy owners, depending on the company’s financial performance. Although dividends are not guaranteed, the possibility of earning extra income is an attractive feature of whole life policies.

Estate planning. If you plan to pass on sizable assets, your attorney or estate planner can help you use the policy’s death benefit to remove some of the burdens of estate taxes for your heirs.

Cons

Higher initial premiums. In the first years of a whole life policy, the premiums are often higher than comparable term life coverage. However, the lifetime level premiums available for a whole life policy become more affordable over time, while term renewals can involve significant increases in premiums.

Long-term commitment. Insurers offer several payment plans for whole life policies, but the most common plans require regular premiums for an extended period of time. Policyholders who cannot consistently pay their premiums may see their policy lapse.

Good financial decision-making is based on solid research and sound advice. If you’re in the market for life insurance, be sure to discuss your options with a qualified insurance representative or certified financial planner and consult your tax and legal advisor regarding your situation.

Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.

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