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Difference between term and whole life insurance | Financial Planning Tips

Multiple Term Life Insurance Options

There are numerous choices and decisions to make when purchasing life insurance.  It can be an extremely confusing process, but being armed with a bit of research and knowledge can make it not only go much smoother, but it might result in you getting a less expensive policy than your life insurance broker is trying to sell to you.

Simply put, life insurance brokers are trying to make money so they are all for a guaranteed acceptance life insurance policy.  They are commission based salesmen and they are always going to push the more expensive insurance options such as whole life insurance and variable annuity life insurance.  You need to resist that sales pitch and choose term life insurance.  Since most people ultimately decide on either term life or whole life insurance, the most important question you should ask yourself is what is the difference between term and whole life insurance?  The answer is that term life is just life insurance that lasts for a certain set number of years, while whole life insurance is life insurance that you need to pay into each year and it contains an investment component as well.  Whole life insurance is going to be much more expensive than term life since it has this investment component, and it is loaded with fees and expenses.  The life insurance brokers make huge commissions off these policies since they make a lot of money for the insurance companies.

Term life is almost always going to be your best bet and now you just need to decide if you want traditional term life insurance or one of the slightly more exotic term life policies such as return of premium term life insurance or joint term life insurance.  All three are good options and you should certainly consult your broker about all three.

Term life insurance is insurance that you purchase for a set number of years, known as the term.  You buy a set amount of insurance, known as the death benefit, and you pay an amount of money each year, known as the premium, each year to keep the policy active.  If you die during the term, the insurance company pays your beneficiaries the death benefit.  If you do not die during the term then the policy expires and both you and the insurance company walk away.

Return of premium term life insurance is slightly more expensive than traditional term life, but it has this twist:  at the end of the term you get back, in one lump sum, every dollar you spent over the term in premiums.  This sounds too good to be true, but it isn’t.  The insurance company would have invested the larger payments over the term and that is what they use to pay you back.  They keep the remaining profits.  This appears to be a win-win for all parties as you don’t feel like you’ve “thrown your money away”, and you still are covered under normal life insurance.

Joint term life insurance is a policy that two people enter into together.  Usually a married couple, these two people are on one policy and if one of them dies during the term the death benefit is paid out to the other.  This is usually a cheaper option than both individuals buying their own term life policy and it helps safeguard a family against one spouse dying.

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