Saturday, June 9, 2012

Life Insurance.....Term or Whole Life??

I'm a few weeks behind in my plans to have life insurance by the time our baby was born, but it's a lengthy process and I wanted to do enough research to help me make a sound decision.  My debate was whether to purchase a term life policy or a whole life policy.

Here's some definitions:

Term Life: A policy that covers the insured for a specific dollar amount in the event the insured dies during the "term".  The term is generally 10, 15, 20 or 30 years.

Whole or Permanent Life: A policy that covers the entire lifespan of the insured.  This policy also combines the death benefit amount with a savings/investment vehicle that builds value over the life of the policy that the insured can potentially withdraw from.

Working for an insurance salesman gave me great insights into this industry and helped me in my decision.  Originally I was convinced that I wanted a whole life policy.  My reasoning being that I didn't want to feel like my dollars spent on life insurance were just being thrown away if I didn't die in the "term".  With a whole life policy, I felt that my premiums were going towards a cash value that I could use in the future.  What I didn't realize until I got some policy quotes, was that whole life is generally 8 to 10 times more expensive on a yearly basis.

Insure to Insure & Invest to Invest

I had heard this before, but it was now starting to make more sense.  My purpose for buying life insurance is to mitigate the risk of leaving my family with nothing if I happen to pass away, not have a high cost investment vehicle.  I am willing to give up some of my money now, to not have that huge expense given to my family.  Even though a whole life policy would grow it's cash value, studies have found that if you take the difference between what you would spend on a whole life policy and a term life, and invest that amount into a common investment vehicle, your returns will be much higher in the long run.

So I'm buying a 30 year term policy and I feel much more confident in this decision now, so just cross your fingers that I don't croak between now and when the policy is in force.

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