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Term and whole life are two types of life insurance policies available to consumers. Term life policies are in effect for a set length of time, such as for 30 years, and the death benefit pays out only if the policyholder dies during the term. Whole life policies provide permanent insurance, remaining in effect until canceled or until the policyholder ceases paying premiums.
Choosing between term and whole life coverage can be complicated, but finance expert Dave Ramsey has three big reasons for recommending term life coverage for the majority of insurance buyers. Here's what they are:
1. Term life insurance typically expires when you no longer need it
On his blog, Ramsey explained that most people only need life insurance for a limited period of time. Specifically, they need it until they become self-insured, which means they're no longer supporting children, they have sufficient retirement savings so their income is no longer necessary, and they have an emergency fund to cover unexpected expenses.
Eventually, most people reach the milestone of becoming self-insured. That's why they need life insurance coverage only for a limited term rather than permanent coverage. According to Ramsey, term life policies generally end right when they are no longer required, making them an ideal choice.
2. Term life insurance is cheaper
Cost is another big reason Ramsey believes term life policies are better than whole life ones. Term life policies are far less expensive than whole life policies -- especially if purchased at a young age, which is what he recommends.
"As we’ve said, term life is always going to be more affordable than permanent life insurance. Term life is a simple policy that guarantees a defined death benefit if you die within that term. Very easy to understand and afford," Ramsey's blog states.
The finance expert urges buying an inexpensive policy and then investing the rest of the amount that a consumer would have spent each month in retirement accounts. This can help them move toward the day when they become self-insured and coverage is no longer needed.
3. Term life insurance isn't supposed to be a retirement investment
One of the selling points of whole life insurance is that it has an investment component. Policyholders pay extra premiums, above the basic cost of insurance, and the money is invested so the policy accrues a cash value.
Ramsey doesn't believe this is a good feature, though. In fact, he believes the very fact that whole life coverage acts as an investment vehicle is actually a bad thing that provides yet another reason why term life coverage is better. "Trying to blend insurance with investing is a disaster that will cost you both in terms of higher premiums and in terms of lower return on investment," Ramsey's blog reads.
Rather than purchasing costlier whole life coverage, Ramsey urges consumers to buy cheap, effective term life coverage that serves the purpose the policy should -- replacing income upon an untimely death. This is advice definitely worth listening to, and many consumers should heed his words and consider only a term life policy when taking care of their life insurance needs.
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