The Great Debate: Term vs. Life Insurance Author:    Posted under: Life InsuranceLife Insurance questions answeredLife Insurance Types


It’s always been the question of all time, whether to get term or life insurance, and if getting term insurance, should you invest the difference?  To make sure that we are on the same plane here, term life insurance is designed for a specified time period, and offers no cash value.  Known to be a lot cheaper than whole life insurance, it is a more popular choice with consumers.  It is used to provide coverage for financial responsibilities such as mortgages, educational expenses, and the like.  Whole life insurance on the other hand, refers to an insurance policy that covers the insurer for life.  Although more expensive than term life insurance, it offers a cash value that earns more over time.  In addition to having a fixed-death benefit, your beneficiaries will also receive the balance of the savings account that has accumulated in value over time.

So which one is right for you?

They say that if you are young and single, and may have just started to work, you may not necessarily have the funds to pay for whole life insurance.  You now are left with term life, being the more affordable choice.  Where then should you invest the difference, and why should you be doing so?  Investing while paying for term life insurance is really for “self-insuring,” where you set aside money by yourself in order to compensate for future loss.  Since term life insurance takes care of the amount that you will need to sustain your beneficiaries in the event of your loss, putting your money in tax-deferred investments will take care of your ‘cash reserves.’  Examples of tax-deferred accounts are individual retirement plans (IRAs), annuities, and certain kinds of bonds.  It is important to remember that you should invest your money where there are guaranteed returns and great tax benefits.

The good thing about term life is that should you still not need to terminate your policy, you can renew it.  However, the only thing that you should be concerned about is that as you age, the cost of your policy also increases.  It should also be taken into consideration that for “buy term life and invest the rest policy,” you should also have the discipline to set aside a certain amount of money which you can invest or save.  Otherwise, you will be dependent on the insurance policy, and will probably never be able to let go of it, even if it becomes too expensive.  You will also be left with nothing at all if you do outlive your policy and decide not to renew it at all.

On the other hand, if you are married and have dependents, it may be wiser to get a whole life insurance policy.  It is a good start to provide for your own expenses in the future, while also thinking about what benefits your beneficiaries might claim from the cash value it also holds.  Understand the policy and the terms by which it operates, especially the fact that a huge chunk of your money will be used by the company for investments in the first few years of your payments.

I don’t think there is really an exact answer to this ongoing debate.  Everything is really dependent on what you need as an individual, or what you need as a family, and what your financial capacity may be at the time you are acquiring the insurance.  It is also important to know what your plans are for the future, because everything would stem from there.  Keep your vision in mind to plan your life accordingly.

Sources:
http://www.loiteringcrowds.com/should-you-buy-term-life-insurance-and-invest-the-rest/
http://en.wikipedia.org/wiki/Buy_term_and_invest_the_difference
http://www.wisegeek.com/what-is-tax-deferred.htm

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