The last year of this pandemic has many Americans facing the reality of their own mortality. Questions such as how would my family carry on should I succumb to a sudden illness or have an accident? Life insurance is one way to protect your family in case the worst case scenario plays out over the coming years.
The Impact of the Pandemic on Life Insurance
After years of dwindling insurance sales, many companies have noted double-digit increases in the number of life insurance policies they’ve sold during the Covid-19 pandemic relative to last year. Experts agree that this is due in large part to the fear of death and greater awareness of financial risks associated with mortality.
In fact, fear of unexpected death has caused the Google search phrases for both “term life insurance” and “whole life insurance” to increase by more than 50%. Let’s explore the key difference between these two types of policies and how you can make the best decision for you and your family in regards to each.
Term Life Insurance: Benefits & Drawbacks
Term life insurance is a policy that covers a policyholder for a fixed amount of time, thus the label “term life insurance.” The average span of a term life insurance policy is between 10 and 20 years, but the term can also cover someone until they reach a specified age. You are only covered for the time period while you are paying the premiums.
This type of life insurance is generally meant to pay a death benefit should you pass during the term of the policy. If you should pass after the policy has expired, your family or beneficiary would not receive any payment.
If the term of the policy ends before the policy owner passes, then the policy typically expires or it may be available to convert to another type of insurance or potentially be renewed for an extended time period.
Some of the benefits of this type of policy include the fact that it can protect your family from loss of income, which is a good idea while you are raising children and paying off your mortgage or larger debts. While the payments are lower for this type of policy, the premiums do increase with each renewal.
One major drawback of this type of insurance policy is that it has no cash value so it cannot be used as a wealth-building or tax-planning strategy. In addition, the protection is only guaranteed for the term of the policy.
Whole Life Insurance: Benefits & Drawbacks
Whole life insurance policies are different from term life in a few key ways. Whole life provides coverage for your entire life as long as you pay the premiums. It also provides some “cash value” in addition to the death benefit, which can be a source of funds for future needs.
Most whole life policies are “level premium,” meaning that you pay the same monthly rate for the duration of the policy. Those premiums are split in two ways. One part of your payment goes to the insurance component, while the other part helps build your cash value, which grows over time. (Source: Investopedia)
One of the drawbacks of this type of policy is that if you take a loan from your policy, your death benefit will go down by a corresponding amount if you don’t pay it back. If you take out a $50,000 loan, for instance, your beneficiaries will get $50,000 less, plus any interest due, if the loan is still outstanding.
Choosing which policy coverage is right for you and your family can be tricky. Work with one of our agents to determine your financial needs for both the long and short term. We can answer all your questions about each policy and how it can benefit your family.