March 17, 2018

Term Whole Life Insurance Suits Different Needs

A study conducted by the life insurance industry found that 35 million American households — roughly one out of every three families — have no coverage at all, and part of the problem is simply not understanding the options available. NY1′s Money Matters reporter Tara Lynn Wagner filed the following report on the types of policies available.

The two major categories of life insurance — term and whole life — can be viewed much like renting an apartment versus buying a house.

Term life insurance is essentially rented insurance for a set period of time — one year, 10 years, 30 years — to cover expenses that are not likely to last the rest of one’s life.

“Could be a mortgage that has a finite life. It could also be an education, so once the children are grown up and out of the house, parents may not necessary need the portion of life insurance that would have paid for college expenses,” says Prudential financial planner Bill Danas.

For more permanent needs, like the daily living expenses of a surviving spouse, one can buy a permanent policy, like whole life, universal life or variable life.

“The intention is that the policy lasts at least one day or one minute longer than you do,” says insurance agent Anthony Domino. “It’s really someone who needs coverage or some amount of coverage for their entire life.”

The proper type of permanent insurance depends on what the policyholder needs and what he or she can afford. For a big amount of coverage on a small budget, term is probably the way to go.

“Term insurance is generally going to have the lowest premium,” says Money Magazine senior editor Walter Updegrave. “For the equivalent amount of cash value or permanent insurance, the premium would be easily as much as 10 times higher.”

Just like buying a house allows the buyer to earn equity, permanent policies build cash-value over time through dividends or interest. That money not only increases the policy’s payout but is also accessible during the policyholder’s lifetime.

“It earns a competitive growth rate. It grows on a tax-deferred basis and it’s their coverage, their policy, their cash value,” says Mark Pfaff of New York Life Insurance. “So they can take a loan against it if they want. They can take full withdrawal against it.”

Since the interest rate can be very low, Updegrave says a policyholder might be better off getting the cheaper term policy and putting the extra money in a different investment vehicle. On the other hand, whole-life is a guarantee. It’s paid when the policyholder dies, regardless of how long he or she lives.

With term life, once the buyer outlives the policy, all those premium payments are essentially gone, but Updegrave says that does not make it a waste of money.

“That would be like giving the impression that I’ve wasted my money buying house insurance because my house didn’t burn down in a fire,” says Updegrave. “So what you’ve really bought over that period is the security of knowing that should you die during that time, your heirs, your children, your spouse will be taken care of.”