Term vs. Whole … What Type of Life Insurance Do You Need?
When it comes to life insurance there are different options out there that you can pick from. There is term life insurance which breaks down into a return of premium and traditional and then there is permanent life insurance which breaks down into whole and universal. What does this mean and how do you know which one to select?
John is 33 years old. He is married and has 3 children. John is an accountant. His wife, Erin, stays at home to raise the children. They own a home that has 25 years left on the mortgage. Neither John nor Erin have any student loans. Outside of their mortgage, they do not have any long-term debt. Recently, they decided it was time to consider getting life insurance to protect against the family losing John. Because their main concerns are protecting against the mortgage and supplying income for the family if John were to pass away, their agent recommended looking at term life insurance. This type of coverage will provide a guaranteed death benefit for a guaranteed premium for a set number of years. In this case, their agent recommended looking at a 30-year term. This length of coverage should outlast the mortgage and get the family to a time where retirement is in sight. Additionally, their agent recommended a 20-year term on Erin to ensure that there is protection until the children are out of the house. While she does not provide income for the family, John would experience increased childcare costs if Erin were to pass away unexpectedly.
Term Life – Return of Premium
Candace is single and in her late 20s. She recently purchased a home and still has significant privately held student loan debt. While she doesn’t currently have a family dependent upon her, she does not what to burden her parents with her mortgage and student loan debt if something were to happen to her. Her life insurance agent has recommended that she purchase a 20-year term, which will provide coverage for long enough to outlast her mortgage and student loans, but the agent has also recommended she add the Return of Premium (ROP) rider to the policy. At her age, this rider is not very expensive and it also gives her options at the end of the 20-year term, including the right to take all of her premium dollars back. This type of policy allows her to have the coverage she needs now and gives her financial flexibility later.
Roberto is in his mid-50s and is looking to retire soon from his state job. Over his career, he has been able to build up a significant pension. In talking with others at his place of employment, he has learned that the pension offers several options. Some of these options offer significantly higher monthly payments than others. The ones that offer the higher monthly payments will only payout for the duration of his life. The lower monthly payments will pay until either his spouse or he dies. The higher monthly payments interest Roberto, but he doesn’t want to put his wife in a tough financial position. His life insurance agent recommends taking the higher monthly payment, but using the difference between the two payments to purchase a universal life policy that will pay a significant death benefit to his wife should he die first. She can then use this payout to provide herself income for the rest of her life.
Kathy is a 72-year-old widow. Her husband recently passed away and she is in good financial shape to keep living her life. That said, she would like to ensure that she can leave something for her children. Her life insurance agent recommends a whole life policy. A whole life policy provides guarantees that the premium will not change, the death benefit will not change, and there will be a continually growing amount of cash value within the policy. Additionally, there are no term limits on whole life. Kathy can rest assured that her children will be paid the death benefit at the time of her passing and she can also feel comfortable knowing that she can use her assets to live her life.