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by Tanza Loudenback
June 06, 2019
by Tanza Loudenback
June 06, 2019
Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, but our reporting and recommendations are always independent and objective.
If you're considering buying life insurance, you first need to decide between term life insurance and permanent life insurance.
Term life insurance lasts for a fixed period of time, usually 10, 20, or 30 years, while permanent life insurance has no end date. Because coverage eventually expires with term life, it's more affordable and straightforward. Those who want to lock in coverage for life may consider a permanent policy, but should also be prepared to pay six to 10 times more. This can translate to hundreds of dollars annually.
Permanent life insurance comes in a few variations, the most popular being whole life insurance, which is a hybrid between an investment and an insurance policy, explains insurance-comparison site Policygenius.
Deciding whether whole life insurance is right for you boils down to two questions, according to Policygenius: Do you want to build cash value? And/or, do you want to leave money behind for your spouse, kids, or grandkids?
If you answered "yes" to either of those questions, whole life insurance may be a good option for you, but there are a few other things to consider.
Whole life insurance policies consist of a death benefit — the amount the policyholder wants paid out to their beneficiaries upon their death — and a cash value component.
Part of each monthly or annual premium goes to the insurance company and part of it goes toward the cash value, which earns a small amount of interest, explains Policygenius. Eventually, the cash value grows to equal the death benefit amount and the policyholder can dip into it to pay for retirement or take out a loan, for example, or leave it to be paid out, tax-free, to the beneficiaries.
With a term life policy, you also determine the death benefit amount and the insurance company decides how much you pay each month after evaluating a number of risk factors. The policy becomes effective when you pay your first premium and lasts for the fixed coverage period. If you're still around when the coverage period ends, the policy expires and that's that. There's no pool of cash left over.
The cash component of a whole life policy can be valuable, especially since the death benefit is not taxed as income, but Policygenius notes that the interest rate is often much lower than what you could earn if the money were invested in an IRA, for example. In other words, it's safe, but usually not the best option for growing your money.
Whole life policy premiums can also be much more expensive than term life premiums, mainly because they pay the insurance company and fund the cash value component. According to Policygenius averages, a 30-year-old man in optimal health can expect to pay about $16 a month for a $250,000 term life policy. That same man would pay $212 a month for a $250,000 whole life policy.
Policygenius also notes that people who buy whole life policies tend to buy less coverage than they should to avoid high monthly payments. How much life insurance coverage you need is highly personal, but minimally includes enough to replace lost income and could cover major future expenses like college tuition or mortgage payments.