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Understanding Term Insurance Policies

By Jason Markum

Insurance can be tricky at the best of times, and sometimes it can be downright confusing. One area that I find confuses people more than any other is the difference between term and whole life insurance.

Choosing between term life insurance and whole life insurance is an incredibly important decision to make and it is incredibly important that you fully understand the difference between the two because if you choose the wrong policy, your family may not receive the coverage you think that they’re going to get if you die unexpectedly.

One of the main reasons why this issue is so confusing is price. Term life insurance is usually much cheaper than whole life insurance and people mistake the cheapness for the worth of it. The fact of the matter is, even though it’s cheaper, term life insurance is usually the kind of insurance that you’re going to want to purchase and I’ll tell you why.

Whole life insurance is more like an investment and less like actual insurance. In a whole life insurance policy you pay in money, and that money is yours. Think of a whole life insurance policy as a little savings account. You keep track of what you paid in, and that money earns interest at a certain rate, and then sometime in the future you take that money back out. But you only get back what you put in plus interest.

There are many benefits for such a policy including investment reasons, and others. For instance, you can often borrow money against your whole life insurance policy, and use it as collateral for loans from the bank and other institutions. So as far as cash flow and money management goes, the whole life insurance policy may be a good bet for you.

But if insuring your family in the case of your untimely death is your primary concern, so that they have the same quality of life and income level that they have come to expect… then a whole life insurance policy is not for you.

What you want is a term life insurance policy. In a term life insurance policy you pay a set premium every quarter, or month, or year depending on how you set it up. In return, the insurance company agrees to pay out a certain set amount of money upon your death. For instance, you might buy a million-dollar policy in which case the insurance company will pay your family $1 million if you die.

Unlike the whole life insurance policy, if you stop making your insurance payment the policy ends and you get nothing back. All the money you’ve paid in so far is gone. And also unlike a whole life insurance policy, your insurance premiums will likely increase year after year.

So now you know the difference between term life insurance and whole life insurance. Hopefully you’ll take my recommendation and go with a good term life insurance policy in order to provide for your family and the case of your untimely death.

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