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What’s The Difference Between Whole Life And Term Life Insurance

Things To Keep In Mind Before Buying Term Insurance:

Term Vs. Whole Life Insurance (Life Insurance Explained)
  • Premium rates vary: Your premium rate will depend on your health. Every term insurance provider will tell you to undergo a medical test to assess the actual cost of a policy. If you are exposed to high medical risk, your premium rates will rise.
  • Be vigilant of your due date: No insurance policy officer will remind you of late payment. If you regularly fail to pay your due on time, your policy will lapse. It will be advisable for you to have a bank standing order or calendar reminder of your monthly premium payment dates.
  • Be transparent: You need to inform the insurance company about your demerit habits as they will reflect your premium amount. Your premium will increase by 25% to 30% because of your demerit habits. If your insurer finds out about your habit at the time of a claim, your claim might get rejected.
  • Pros Of Whole Life Insurance

    • Coverage for Your Entire Life

      Whole life insurance covers you for your entire life or until age 100 or 121 as long as you continue to pay premiums on time. Even if you let your policy lapse, you’ll still have access to its cash value as long as the policy wasn’t drawing from the investment to cover premium payments.

    • Continuing Death Benefit

      With whole life insurance, your heirs will inherit the value of your policy tax-free no matter how long you live.

    • Riders Can Make Some Funds Available While Youre Alive

      You can include a rider in the policy that will let you start drawing part of the death benefit for long-term care needs. This has an advantage over a long-term care policy, which has a waiting period for receiving benefits.

    • Ability to Borrow Against Your Policy

      You can borrow against your policy tax-free, up to the amount of the cash value.

    • Straightforward Coverage

      You know precisely what you get with whole life insurance: a locked-in premium, fixed interest rate on your cash value and terms that dont change.

    • Guaranteed Maximum Expenses and Guaranteed Minimum Interest Rate

      There is a guaranteed maximum on the expenses your insurance company can charge you and a guaranteed minimum interest rate on your cash value growth.

    • Flexibility if Your Financial Situation Changes

      If you cant pay premiums due to financial hardships, you can use your cash value to cover payments and maintain your policy.

    Should I Convert My Term Life To Whole Life

    Most term life insurance policies are convertible to whole life policies. When you convert from temporary insurance to whole life insurance, you will begin building tax-deferred cash value. You can take a cash value loan against the policy, withdraw the cash value or take the cash value should you decide to surrender the policy.

    You can convert your policy if your life situation has changed or you retire. For instance, you may have a long-term dependent, such as a child with special needs. Or maybe youve always wanted whole life insurance but settled for term because the premiums cost less. But now your established career allows you to afford the increased premiums.

    What Is The Process Of Renewing Term Insurance

    • Policy review: before renewing your existing policy, review your cover and discounting options to optimise your charges. As you wont be using your term insurance for a long period, you can change your policy to suit your current priorities.
    • Provide policy details: visit your policys website and click on the policy renewal tab. There, you will provide your policy number, date of birth, and other information. Post, you need to verify and confirm your details.
    • Make Payment: You can make your payment for a policy renewal via cheque, credit card, debit card, SMS, online banking, mobile wallets, bank auto-debit facility, bank collection centres, or at the branch office.

    How Much Term Life Insurance Should You Purchase

    Level Term Life Insurance: What It Is and How It Works

    Experts recommend buying a term life policy for 10 to 15 times your annual income. While this method is better than coming up with a random number, it has certain obvious limitations.

    The most obvious one is that it doesnât take your current savings into account. Also, it doesnât work for someone who is a homemaker.

    A much better approach is to consider your annual income and then multiply it by the number of years for which you need protection. Next, to this number add all your current debts and future needs .

    Finally, from this number subtract liquid assets . The figure you get is a rough estimate of how much life insurance you need.

    What Type Of Life Insurance Should I Avoid

    The type of policy that works for you depends on your familyâs specific needs. The policy that works for you will depend on your specific needs that include details about your lifestyle, your current health, and any dependents you may ultimately be responsible for supporting.

    The bottom line is that you should avoid buying more life insurance than you need.

    Term Life Insurance Vs Whole Life Insurance

    If youâre shopping for life insurance, you have a bunch of options available to you. Deciding on the best one for you and your family, well, thatâs another matter.

    Should you go with term or whole life insurance? Which is better? The differences between whole and term life insurance are like the difference between taking a taxi or driving your own car. They both get you to the same destination, but they serve different purposes. The thing is, even car owners sometimes opt to take a taxi when circumstances warrant dedicated taxi riders may someday find it useful to own their own car. Neither mode of transport is inherently better than the other â just different.

    Advantages Of Whole Life

    • The primary benefit of whole life insurance is that it is permanent coverage and may be utilized to meet long-term requirements such as death, dying, and final burial expenses.
    • The level premium allows the policy owner to know precisely how much insurance will cost and offers a form of coerced savings.
    • Whole life insurance allows the policy owner to use some of their money for emergency expenses, as a supplementary retirement income source, and other long-term care insurance.

    Is Whole Life Better Than Term Life Insurance

    Why Is Term Insurance Better Than Whole Life Insurance?

    Whole life provides many benefits compared to a term life policy: it is permanent, it has a cash value investment component, and it provides more ways to protect your familys finances over the long term. Those features make it a better choice for many people but if youre only looking for the biggest death benefit you can get per dollar paid in premiums, then term life insurance may be a better choice.

    Should I Buy Term Or Whole Life Insurance

    For most people, term life insurance is the best choice. The relatively low cost for a high level of coverage makes term life insurance an excellent deal for many people. In contrast, whole life insurance is almost always an expensive, low-return proposition.

    In case that wasnt clear enough for you, outside of certain wealthy families looking for tax savings with their estate plan, you should probably not get whole life insurance. Even still, you can get the exact same estate tax advances from a term policy that you would from a whole life policy . . . as long as you die during the term. Either way, term life insurance is almost always the best choice.

    How Does Whole Life Insurance Work

    Whole life insurance offers permanent coverage that lasts your lifetime. Your chosen beneficiary or beneficiaries will receive the death benefit amount when you die. This type of insurance includes:

    • Fixed Premiums: Your premiums will be the same for life, regardless of age, health and inflation.
    • Face Value Death Benefits: As long as you pay premiums on time and don’t have any outstanding policy loans, your beneficiaries will receive the face amount of the policy when you die, tax-free.
    • Tax-Free Cash Value: The cash value, or savings component of your policy, will grow each year without taxation. This cash is also yours, meaning you can access it via loan and withdrawal options. You would only be taxed if you withdrew more than what you put into the policy. However, making a loan against the cash value will reduce your death benefit if not paid back, and you’ll also be charged interest on the loan to make up the difference.

    Term Vs Whole Life Insurance

    Whole life and term life policies have one major thing in commonthey both pay a death benefit when you pass away. So, for example, if you have a $100,000 term life policy and you pass away during the term, your beneficiary will receive $100,000.

    Likewise, if you purchase a $100,000 whole life policy and continue to pay the premium until you die, that policy will pay $100,000. With both term life and whole life, the death benefit is typically distributed tax-free and can be used for any purpose.

    Why choose term life insurance Why choose whole life insurance
    Usually has cheaper premiums
    Life-long coverage

    Age

    Whole and term life policies also approach an applicants age in a similar way. With both types of life insurance, you will pay a lower premium if you purchase a policy while you are relatively young. If you wait until you are in your 60s, you will pay a much higher rate or may not qualify due to a medical condition.

    Duration

    When comparing term versus whole life insurance, the two types of policies have a few significant differences. Term life only covers you for the length of the term, while whole life continues to cover you until the end of life under most circumstances. However, some term life policies can be continued after the term ends, if the policy is convertible or renewable, as long as you meet your policys deadlines for conversion or renewal.

    Prequalification

    Savings Benefits

    When To Pick Term Life Insurance

    Common Types of Life Insurance Infographic
    • Term life insurance can protect your family financially. For example, if you pass away but still have financial debt , term life insurance acts as additional income to help your family manage those obligations.
    • In Canada, term life insurance is best for those who want an affordable option as itâs typically cheaper than whole life insurance, especially if youâre young and in good health.
    • If you want to save money and reallocate portions of your budget, a cheaper term life insurance policy means you can save what you would have paid for a whole life policy and choose to put that money elsewhere. For example, you can invest the difference.

    What Does Life And Term Insurance Mean

    A whole life insurance plan is applicable for the insured persons entire lifetime. It helps to build a financial corpus steadily over the term of the policy. Once you have built a sufficient amount of money, you can also borrow money against it if you qualify the terms and conditions of the company. a cash value component remains attached to a whole life insurance plan. the plan is so flexible that it allows the insured person to increase or decrease the premium payments at a later date. Usually, for this type of policy, you need to pay a higher rate of premium payment if you are a smoker, have a poor health profile, do not lead a healthy life, or if you work in a risky or financially unstable profession.

    On the other hand, a term insurance plan is a fixed-tenure life insurance policy. Unlike a pure life insurance plan, a term policy does not come with any maturity benefit. However, some insurers have started to offer term plans with an option to return premiums paid towards the policy on maturity if nothing happens to the life insured. As per the market records, some term plans have come up with the highest sum assured options across life insurance products. In case of the unfortunate and untimely demise of the life assured, the beneficiary or nominee is entitled to receive the death benefit.

    Final Expense Life Insurance

    Also known as funeral or burial insurance, final expense insurance is a type of whole life insurance that offers a smaller and more affordable death benefit designed to help cover your end-of-life expenses like funeral costs, medical bills, or outstanding debt. While other types of life insurance may have age and health requirements, final expense policies can be easier for older or less-healthy individuals to qualify for. A final expense policy’s cash value would operate the same as a whole life policy’s.

    Are There Drawbacks To Permanent Life Insurance Like Whole Life

    One of the big negatives of whole life insurance is that, depending on your age, health, and other particulars, the premiums could be five, ten, or even fifteen times higher than for term life insurance.

    Some people find the payments so high that they eventually let the policy lapse. In that case, they may want to simply walk away with the cash value of the policy, but keep in mind that there are penalties if you do that.

    Remember, too, that risk and return are generally inversely related. The cash value a whole life policy accrues is based on a guaranteed interest rate set by your insurer. But you could also consider purchasing a more affordable term life policy, and then investing the money youre saving in things like treasury bonds or index funds.

    But hey, were not financial advisors, and were not pretending to be. Its just a good idea to ponder all of this before discussing things with whatever expert you trust with your money.

    What Is The Difference Between Long

    Term Vs Whole Life Insurance | Life Insurance Explained

    A long-term care life insurance policy helps cover the cost to administer long-term care to senior citizens who require assistance throughout their day-to-day lives. This includes costs to assist with routine daily activities like bathing, dressing, or getting in and out of bed.

    Unlike whole life insurance, which has more of a cash value investment attached to it, long-term care insurance reimburses senior citizens for the cost to help them get through their days.

    Whole Life Insurance Advantages Over Term Life Insurance

    Just like term life insurance, a whole life insurance policy will pay a death benefit to your beneficiaries upon your death. Thatâs where the similarities end.

    While a term life policy covers you for a specified time period, a whole life policy will cover you for your life, so long as your policy remains in force. The insurer will pay the death benefit regardless of when you die.

    In addition to providing the death benefit, a whole life insurance policy has benefits that are useful while youâre alive. Whole life insurance accrues cash value as you pay your premiums, which you can use to pay for virtually anything you wish.1 Depending on your insurance policy and provider, you may even receive dividends that you can use to pay premiums, increase cash value or receive as cash.2 A term life insurance policy doesnât offer any of these benefits.

    Because of the added living benefits, whole life insurance typically carries a higher price tag compared to term life insurance. Back to the car analogy: Youâre going to pay more for a car rather than a taxi ride, but there are a host of additional benefits that come with owning your own vehicle .

    People typically use whole life insurance when they want to have a guaranteed death benefit and the cash accumulation that will occur during your lifetime. Many people start with a small amount of whole life insurance and then gradually add more during their lifetime.

    Who Is Term Life Insurance For Vs Whole Life Insurance

    Whole life insurance is suited for high-net-worth Canadians who need it for estate planning. And life insurance is only meant to replace your income in the event that you pass away. It’s not designed to help you invest your money efficiently.

    Canadians are getting wise to this. According to the Canadian Life and Health Insurance Association, term life insurance grew in popularity by 39% in 2020, while whole life insurance only grew by 12%.

    âTerm life insurance best meets the needs of most Canadian families. It’s a more affordable product, too.

    There are many better, more profitable ways to invest your money other than whole life insurance. Options like an RRSP or TFSA will generate more money for your loved ones after you’re gone.

    Take a look at this quick explainer video for more information about how term and whole life insurance compare.

    Recommended reading: what is term life insurance in Canada?

    What Information Do I Need When Getting A Life Insurance Policy

    Applying for life insurance will mean providing some personal info, so lets look at a few of the things youll need to answer as you look for coverage.

    • Do you already have any existing life insurance?
    • Hows your overall health?
    • Any medical history of serious illness?
    • Whats your household income?
    • How much are your monthly expenses?
    • How much debt do you have, including a mortgage?
    • What plans have you made toward retirement?
    • What are your plans to cover college for your children?
    • Have you thought about how you want to pay for funeral expenses?
    • Whats your strategy around estate planning and tax?
    • Do you have a will, and does it include plans for a trust?
    • Whats your age?
    • The ages of your children?

    About the author

    Ramsey Solutions

    Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.Learn More.

    Why Life Insurance Is A Bad Investment

    Term vs Permanent Life insurance

    Having adequate life insurance coverage is an essential part of retirement planning, but it should by no means be viewed as an investment. Life insurance was never meant to be an investment, but something to provide for final needs and for your family members once you do pass away.

    Beyond the misuse of the whole/universal life product, the other major problem behind using permanent life insurance as an investment is that you have no control over how the funds are invested. While you might find a company that fits alongside your general investment philosophies, you still have little to no control over how excess premiums are allocated and invested. Accessing cash value comes with a cost: the lowering of the face value of the policy.

    Accessing cash from a universal life policy could cause the cash value to go lower than the associated costs and thus harm the policy. Also, any loans taken out against these policies incur interest, which must be paid back. If youre young that might not be a problem, but many in retirement arent seeking to pay back loans on things such as life insurance.

    Buying life insurance is a personal decision. Dont allow sales materials to convince you that one type is better than another, but consider the needs of you and your family.

    • See all your money, all in one place.
    • Stay on track with our Retirement Planner.
    • Get up to date with our Investment Checkup.

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