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Frequently Asked Questions
Life insurance is a type of investment that you can use to provide your surviving loved ones with an income or a lump sum after your death. It’s part of a broader end-of-life and estate planning package that has real value to some people but not so much for others.
One of the most common questions people have is in the real difference between term vs whole life insurance. On the surface, it’s simple: term life insurance expires and whole life insurance doesn’t. Practically speaking, however, they have different uses and cater to different people.
So what is the difference, and how much is life insurance worth it in the first place? Here’s what you need to know.
What is Term Life Insurance?
A term life insurance policy is a form of insurance that provides a death benefit only if a claim is made while the policy term is still active, which may be 5, 10, 15 or 20 years.
Once the term expires, it will no longer pay out a death benefit. If you want to continue your coverage you either need to renew it or convert your policy into whole life insurance.
What Is Whole Life Insurance?
Whole life insurance is often referred to as a permanent policy. Unlike a term policy (a policy with a fixed expiry date), your whole life insurance continues to cover you as long as you remain up-to-date with the premiums.
When Should You Choose Term vs Whole Life Insurance?
You might read the differences between term vs whole life insurance and ask why you might want a policy that doesn’t cover your whole life.
However, term and whole life insurance policies do cater to different people.
People who benefit from term life insurance are those who are young but who don’t necessarily want to go uncovered. Term life insurance is less expensive, and you can match it to meet your needs. For example, if you’re worried about leaving your loved ones behind to face private student loans or a mortgage, you can take out a term life policy that covers those bills (both in terms of the benefit and the term).
Whole life insurance is more expensive, but it does provide you with coverage both today and years or decades down the line. When you have lifetime coverage, your beneficiary will receive a death benefit (as long as your policy is valid). They can use it as an income replacement, to cover final expenses, or however else they see fit.
Some people also use whole life insurance to build equity because once you build up enough cash value in your policy, you can borrow from it. Though, if you don’t pay it back then your death benefit will be smaller. Some insurers also provide benefits like dividends, which rewards you for investing with them.
So while whole life policies are more expensive, they do come with benefits for estate planning that do make them attractive.
Is Life Insurance Worth It?
Life insurance offers a fairly straightforward promise: it benefits people who will leave behind survivors (partners, spouses, children, other dependents) and who want to ensure that they have some cash – at least for a while.
The policy is beneficial for many people, particularly if you have any long-standing debt that could make life difficult for your survivors.
However, life insurance is usually not worth the premiums if you:
- Don’t have any debts
- Don’t have any dependent beneficiaries
- Don’t earn enough to put money into your policy
The trick with whole life insurance, in particular, is that you get out of it in cash value what you put into it. You don’t pay a monthly premium and automatically get the whole death benefit. You only have access to the full benefit if you pay in over a significant period of time.
What is the Best Life Insurance?
Finding the best life insurance and the best life insurance company means first taking a full assessment of your current finances (including debts and assets) and where you want to be in 10 or 20 years.
Your best bet is to shop around for life insurance quotes that not only cover your core interests but also provide affordable premium payments in the meantime.
Unfortunately, there is a catch: buying life insurance when you’re young and healthy means you pay far less in premiums (in terms of the monthly payment). However, there’s less need for this kind of policy when you’re younger.
What Type of Life Insurance Policy Will You Choose?
Like any investment, a life insurance policy works best when it works for you. Whether you choose between term vs whole life insurance or no life insurance at all depends on your age, your dependents, and your finances.
That’s why it’s important to know what kind of life insurance coverage you need before you sign on the dotted line. Otherwise, you’ve added a new monthly bill that doesn’t even work for you!
Are you looking for more ways to save? We can help you find a life insurance policy that suits your needs and your budget.
Is Life Insurance Taxable?
The answer is that generally speaking, the beneficiary won’t need to declare the death benefit as taxable income. This applies to life insurance generally, and there’s no differentiation between whole or term life insurance. However, if your beneficiary receives a lump sum and earns interest on it, they do need to pay tax on the interest they earn.