Tuesday, 1 August 2006
The Difference Between Term And Whole Life Insurance
Last month, two good friends of mine had their first child — a beautiful, healthy baby girl. After a few weeks of celebrating and seeing family (and finding out firsthand what a challenge parenthood is), they decided it was time to think about life insurance.
Life insurance is a touchy subject for most people. After all, no one wants to put a price on their own mortality. But life insurance protects your loved ones, and my friends decided it was a protection they needed to provide for their new daughter. Trouble was, they weren’t sure which kind they needed.
There are two kinds of life insurance: term life insurance, and whole life insurance.
- A term life insurance policy only lasts for a certain number of years. Because you can outlive the policy, the beneficiaries of the policy (usually your family) may never receive a payout.
- A whole life insurance policy lasts as long as you do. When you pass on, the policy pays out. Whole life is also sometimes called permanent life insurance.
At first glance, whole life seems like the smarter investment. Why would you pay for a policy that might never pay out?
The simple answer: term life is cheaper, and you may never need it to payout. You can save money on the lower premiums, and invest the difference. With a term life policy, you’re protecting your family during your working life.
Take my friends as an example. The dad — we’ll call him John — has a job as a computer consultant. The mom — let’s call her Jane — teaches kindergarten. They make a decent living. They have two cars, and a small house with a mortgage.
Suppose one of them were to die suddenly. Neither would be able to afford the home mortgage without the other’s income. And sending their new daughter off to college someday would be difficult.
So they bought term life policies. If something were to happen to either of them, their policy would make sure that they can keep the house, send their daughter to college, and still have enough left over to be comfortable. And they’re investing the money they save on premiums and saving for their retirement.
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