life insurance

Choosing between term and whole life insurance. What you need to know 2022

If you’re wondering how term life insurance differs from whole life insurance, this article has the answer and more. Both of these life insurance options allow you to leave money to your beneficiaries or estate to help them avoid financial hardships if you die. At Auto & General, we offer both term and whole life insurance at reasonable rates. Most importantly, we want you to have the information you need to decide which of these two life insurance options is best for you.

In the event that the insured person dies, life insurance pays out a lump sum to beneficiaries or the estate. It is available in two varieties: term insurance and whole life insurance.

What is term life insurance?

Term life insurance protects the insured for a set period of time, with defined inception and termination dates. For example, if a 30-year-old healthy man purchases an R1 million 20-year term life insurance policy, his beneficiaries will receive R1 million if he dies before the age of 50.

When a term life insurance policy expires, the insured has three options: reapply for a new one, apply for whole life insurance, or choose not to take out another policy. The option chosen will be entirely determined by the needs of the insured person.

Term life insurance often suits young, middle-aged people who want to cover the cost of their major liabilities. These people typically have home loans, car loans, or young children who depend on them. To illustrate: suppose someone has a 15-year-old son or daughter who is in grade 10. This person could take a term life insurance policy to help cover their son’s or daughter’s university fees in case they die before this child could start working. In this scenario, a 10-year term life cover may be adequate, knowing that when it lapses, your child would have completed his or her university studies, and perhaps a working career.

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What is the procedure for purchasing term life insurance?

The insured person enters into a contract with an insurer and agrees to pay a monthly fee in exchange for coverage. This monthly fee is known as a premium. This premium is determined by factors such as your age, health, gender, and the size of your policy. This means that the premium for a $1 million cover policy will be higher than the premium for an $850,000 cover policy for the same person. Term life insurance premiums are fixed for the duration of the policy.

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What is whole life insurance?

If term life insurance does not seem like a good fit for you, consider whole life insurance. This is also known as traditional or permanent life insurance, and it covers you for the rest of your life as long as the premium is paid.

Whole life insurance is available in two varieties: level-premium insurance and escalating-premium insurance. Escalating-premium life insurance increases at a set rate each year, helping to offset the effects of inflation. If you can afford rising premiums, this type of insurance is ideal. A level-premium policy, on the other hand, maintains a fixed premium throughout the policy’s life. It is appropriate for someone who prefers a predictable year-to-year budget.

How does whole life insurance work?

Whole life insurance, like term life insurance, is based on the insured’s age, gender, health, and the amount of coverage. The longer a person goes without life insurance, the more expensive it becomes for the same amount of coverage. Purchasing life insurance when you are younger and healthier may be less expensive than purchasing it later in life.

The whole life insurance policy is divided into two parts: one for life insurance and the other for investment. An insured person can earn interest or dividends on the investment portion of their life insurance policy while also building cash value. The cash value can be used to pay future insurance premiums or as a source of funding, similar to a loan.

Which is preferable, term or whole life insurance?

People’s life insurance coverage requirements vary, in part because they live different lifestyles. Some people can afford to pay high premiums, while others cannot.

On the other hand, someone may be able to afford whole life insurance but prefer term life insurance because it better meets their needs. It’s not uncommon for people to choose different types of insurance. How do you choose between the two options? Let’s look at the benefits and drawbacks to help you make a decision.

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