Life Insurance protects the loved ones who are financially dependent on you. If anything unexpected happens to you, life insurance can prevent them from suffering financially by providing financial support to replace your income.

Interesting fact: On average, people estimate life insurance to cost three times what it actually does.

Term life insurance or whole life insurance? To determine which type of insurance is right for you and your family, it is important to understand the basics of life insurance and the difference between the two instruments.

Term Life
Term life insurance policies pay the family of the deceased death benefits if the insured person dies before the policy’s term expires. The money received by the beneficiaries upon the death of the insured is limited to the face value of the policy. Generally, term insurance can be purchased in periods of 10, 20 or 30 years. Younger people usually can purchase term insurance for very reasonable rates.

One risk that must be considered when comparing term insurance with a whole life policy is the possibility that the insured might become ill or suffer a serious disease during coverage, which can make the individual “uninsurable” when the term insurance policy concludes. One solution to this is to purchase renewable term coverage. However, the premium for these policies generally increases each year.

The lack of a cash-investment component attached to term insurance is often a key argument in favor of whole life insurance, but people who choose term insurance can invest the difference between their term insurance premium and what it would cost to purchase whole life insurance. This strategy offers more flexibility and control over your resources and might also offer a better return on investment in the long run.

Whole Life
Whole life insurance provides permanent insurance coverage. Premiums are usually fixed and must be paid on a periodic basis, and this policy has an investment component that builds the cash value over time. The funds are invested by the insurance company, and any accumulation in the account is tax-deferred and can be borrowed against. Generally, the insurance company guarantees a minimum rate of growth.

The cash value feature is the main difference to consider if you’re evaluating term vs. whole life insurance. Whole life policies pay out a death benefit, which is capped at the face amount as expressed in the terms of the policy. When the face value amount is paid to the insured, the insurance company keeps all the cash value that has accumulated in the policy.

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