The two main forms of life insurance are whole life and term life. If you are in the market for a life insurance policy, you should make sure you understand the difference between the two before you buy anything, so let's talk about the difference between whole life vs term life insurance.
It's pretty simple, really. Term life is only an insurance policy. Unlike whole life, the policy itself doesn't build up a cash value. It isn't worth anything unless you die and your beneficiary is able to collect the insurance. You can't get any money by cashing out the policy when you no longer need life insurance.
A whole life policy is another matter. You see, if you keep paying the monthly premiums on a whole-life policy, after awhile you will be able to cash it out if you choose to do so. You usually have to own the policy for a certain amount of time before it accumulates any cash value. After that, the policy continues to increase in value over time. It could amass a value of thousands of dollars before you reach retirement age, depending on when you start the policy.
It's easy to be led to think that a whole life policy must be a better deal because you are getting something extra. However, that is not necessarily the case. It's true that the term life doesn't have a cash value, but the premiums are usually much lower as well.
You have to take the difference in price into consideration when deciding which life insurance policy is the better value. You also have to consider whether you are really getting anything extra at all by purchasing whole-life.
You see, even though the insurance salesman makes it sound like you are buying something extra by getting a whole life policy with a cash value, that is just not the case. The way it works is this: if you die while insured, your beneficiary gets the insurance but not the cash value. If you cash it out, you get the cash value but not the insurance. So what were you paying extra for?
Let's look at it another way and consider a different option. You will pay less for a term life policy than for a whole-life policy, so consider what would happen if you invest the difference into an investment that is likely to give you a better return on your money, such as a mutual fund. If you do that, you will have both the investment and the insurance for the same cost as the whole-life policy, which will only allow you to collect one or the other.
Before you purchase any insurance policy, you should do the math yourself and determine which type of life insurance policy is best. Don't just take my word for it, or the salesman's either. If you evaluate both policies carefully, you will probably find that the term life insurance provides the best possible value for the money.
by Eddie Lamb
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