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When you are considering a term vs. variable life insurance policy, you have a lot to think about. Not only do you need to consider whether or not you want there to be any risk involved with the money you are giving to a life insurance company, but you also need to consider how much money you have to spend on your insurance.
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In order to make an educated decision about whether you should choose term life insurance or variable life insurance, you need to understand what each of these insurance options offer. Keep reading to learn a little about each option so that you can determine which one is right for you.
Term vs. Variable Life Insurance: What is term life insurance?
Term life insurance is an insurance product that expires after an agreed upon amount of time. A term life insurance policy is the most affordable type of insurance to purchase because the guarantee of benefit expires with the policy.
The benefit of choosing a term policy is that you can purchase a lot of insurance for a small amount of money. In fact, in most cases, you will find that a $500,000 term life policy costs less than a $200,000 whole life policy. Naturally, there are factors the insurance company uses to determine how much your policy will cost, so get a quote for several levels of insurance before you buy.
The policy holder, that’s you, determines how much insurance they need and how long they need the policy to last. For example, if you have a 5 year old child and you want to ensure that, if you die before they graduate from college, all college expenses are covered, then you might choose a $200,000 policy that lasts for 20 years.
Once your term expires, your policy does too; although, some life insurance companies do allow for renewal. Some companies allow for a 5 year renewal at a time while others then establish a year to year renewal. Typically, your premiums will increase each year if you select this option.
Most insurance companies have an age limit for those that can purchase term life insurance. This age limit will vary between companies. Some companies only sell term life insurance to those under the age of 55 while other will allow a purchase up to age 70.
Term vs. Variable Life Insurance: What is variable life insurance?
Variable life insurance is very similar to whole life insurance. Basically, you pay a minimum premium to keep your policy in force. You then have the option to pay higher premiums to create a cash value for your policy. That additional cash is invested to earn you, hopefully, a substantial interest rate so that your cash value can grow.
In addition, once you have accumulated a cash value on your policy, you can use that cash to pay your premiums. This is a great option for people whose income varies from month to month making it impossible for them to commit to a single standard premium.
If, however, your policy’s cash value reduces to zero, you still have to pay premiums for the policy to continue in force or your policy will lapse.
The only difference between a variable life insurance policy and a universal life insurance policy is the ability to choose how the cash value of your policy is invested. You can choose any type of investments that you want and you can choose multiple investments. If you make poor choices then you lose money, if you make good choices, then you earn money.
One of the downsides to choosing a variable life insurance policy is that, if you choose to withdraw money from the cash value portion of your policy, your benefit will be reduced by that withdrawal amount.
Think that’s okay? Then think about it this way, what if you had a checking account and a savings account a the same bank. You have money in both accounts so you withdraw $500 from your checking account. Your bank then takes an additional $500 from your savings and keeps it for themselves. Is that okay?
Term vs. Variable Life Insurance: How do I know which is the best life insurance policy?
You are the best person to answer this question. You need to determine just how much insurance you need and how much you can afford to pay in premiums. Also, decide if you mean to use this as an investment tool, a safeguard for your beneficiaries, or both.
If you need a high dollar insurance policy, then a term policy may be right for you. If you want a long term investment that will grow and you have more money to spend on premiums, then a variable life insurance policy may be right for you.
The truth is that because these polices are so different that comparing them is like comparing apples to oranges. They just aren’t the same except for their shapes are similar. Everything on the inside tastes completely different. When it comes to life insurance, you need to build a policy around you and your family’s needs.
To accomplish this goal, you should start by comparing rates between companies. Not only should you look at term and variable life policies, check out whole and universal as well to see if one of those suit your needs.
You can get started right now by comparing life insurance rates and companies with just your zip code to start!