Term VS Whole Life Insurance: Which Is Better?

Term VS Whole Life Insurance – Now that you know the basics about whole life insurance, let’s dig a little deeper and find out more. We’ll start by comparing term life and whole life policies.

Term life is obviously a shorter-term solution than a whole life policy. It’s cheaper, gives you a guaranteed death benefit, and you can pick how long the policy lasts. But though you pay less each month, you don’t get a chance to make that money grow. This is one of the special benefits of a whole life policy.

Term VS Whole Life Insurance Compare

Term VS Whole Life Insurance Comparison

In general, if you’re looking for an investment strategy or a way to leave more money to your kids, whole life might be a good fit for you. If you’re looking for an inexpensive solution, this might not be the right place to put your money. You may be better off looking for a term policy.

We’ve compiled more information and buying tips below to help you see if this type of insurance is right for you.

There are four main reasons to choose this policy over a term life policy:

  • To use it as an inheritance for your kids
  • To make sure you’re covered for life
  • The freedom to choose one lump-sum payment or installment payments
  • Easy to convert to an annuity

There are also four good reasons not to choose this type of policy:

  • Only need coverage for a specific amount of time
  • Can’t afford the higher cost of a whole life policy
  • You need more liquid cash available to you during your lifetime
  • You need a policy that offers small monthly payments

Dividends and The Policyholders

This type of policy pays dividends to the policyholders. If you’re invested in Wall Street, you’re probably familiar with the idea of dividends. When the company you own stock in does well, any profits that aren’t re-invested in the company are divided up among the shareholders.

Dividends from a participating policy work the same way, with one key advantage for you: you get a tax break. Normally, you’d have to pay tax on dividends issued by a company you own stock in.

But because you’re always putting money into your life insurance policy, the IRS considers your dividends as a partial refund of your monthly payments. The upside here is that you don’t have to pay tax on the dividends because they’re not treated as income.

This type of policy has just one payment for you to make—you pay the entire thing up front. Why would anyone do this? This type of policy has a built-in advantage because the death benefit is higher than the premium you pay up front. Think of it as a kind of loan. You’re giving the insurance company money up front, and they give you back an even bigger amount of money later.

Cash Investment In The Policy

The cash you invest in this policy is going to build equity quickly because of the large sum you started with. This makes it a good idea for younger people who have time to let the policy build up a good deal of interest.

Investopedia gives a few eye-popping examples of how this type of policy can work. They mention that a 50-year-old man might get a $100,000 single premium policy and end up leaving a $400,000 death benefit when he passes away. Of course, few of us have $100,000 to start with, so this is an extreme example, but it shows you the kind of potential a single premium policy has.

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