If you're shopping around for life insurance, you start with two big questions: How much insurance do I need? And what type of policy should I buy?When you've calculated your short- and long-term obligations, it's time to decide what type of policy is right for you: term life or whole life insurance.Term life insurance provides coverage for a specified period of time, such as 10, 15 or 20 years; premiums go up over time unless you buy a "level term" policy, which guarantees that premiums stay the same. It's possible that you could outlive the term of your policy, in which case your policy expires and you'd have to shop for another policy if you wish to still have coverage.With a whole life policy (also called permanent insurance), you don't have to worry about possibly outliving your policy term because your contract gives you coverage for your entire life, as long as the premiums are paid. With a whole life policy, unlike term life, you also build up "cash value" in the policy that you can tap in the future.Premiums are significantly higher for permanent insurance than term life due to charges and fees (see sidebar) that you don't pay with term life.Cash value is a crucial selling point for whole life: It's an account within your policy that builds up over time, tax-deferred, fueled by a portion of your premiums and interest paid by the insurance company. In fact, the whole life contract is designed for you to take advantage of that money in the future. When you die, your beneficiaries receive the death benefit, not the cash value, with the exception of some universal life policies.Whole life insurance policies build up cash value slowly at first but then pick up the pace after several years, when your earnings start to grow faster than your "mortality" cost (the cost of insuring you). If you would like whole life insurance explained in more detail, your life insurance agent should be able to show you a few types of policy illustrations.
Whole life could be an attractive option for any of these reasons:Others are relying on you for long-term financial support.You're worried about outliving a term life policy and being unable to buy further insurance due to age or deteriorating health.You want to build up cash value in addition to protecting your beneficiaries.You want to create an estate for your beneficiaries after your death.Your beneficiaries need the benefit to pay estate taxes on other assets."Whole life insurance is suited for anybody who loves somebody," says Scott Berlin, senior vice president in charge of the Individual Life Department at New York Life Insurance Co. "Whole life does two things for you: protects your family and allows you to save for the future."Berlin says whole life's advantages are that you don't have to worry about outliving your policy (as is possible with term life) and there is the "forced savings" component of the cash value account, which grows tax-deferred. Once your cash value is built up, you can access it for anything - retirement, your child's college tuition or the vacation you've always wanted. Whole life policies are also eligible to earn dividends (depending on the company and not guaranteed) which can be used in a variety of ways, such as providing paid-up additional life insurance, which increases both the life insurance benefit and policy cash value."Buying term is like renting your insurance," says Berlin. "You don't build up any residual value. Whole life is like owning a home - you build up equity."Berlin cautions against buying term life insurance just because of the premium difference."When you're 35 you think that 20 years is a long time, but life doesn't always work out like you think," he says. "People who buy permanent insurance understand the value of what they're providing to their family."If you decide that a whole life policy is right for you but feel you're currently unable to afford the premiums for the face value you desire, Berlin recommends buying as much whole life as you can afford and filling in the rest of your face amount with term life. Later, you can convert your term life policy to whole life.For the wealthy with large estates, putting a whole life policy into a trust is a way to pay estate taxes when they die.A smorgasbord of choices
