Whole Life Insurance or Term Life Insurance – Which do you need?

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Whole Life insurance versus Term Life insurance. Which one do you need in your particular situation? That is the question. Fortunately, for everyone, the answer is simple.

If you are single, have no children and no one depends on your income then you can stop right here. You don't need whole-life or term life insurance.

Life insurance is to protect your loved ones from a financial crisis if you die unexpectedly. I say "loved ones" but really what I mean is anyone that depends on your income for survival.

Keeping it simple here's what you need to know.

Whole Life Insurance

Expensive. Avoid it. It is sold to you as an investment. You pay a high price for it and many times you get nothing back.

Term Life Insurance

If you have a family or children that depend on your income then you absolutely need it. Buy it now.

How much term life insurance do I need?

As a rule of thumb you will need your annual expenses multiplied times the number of years you will need the income. For example, a widowed mother with annual living expenses of $30,000 will need this amount annually as long as she has to provide for her children. Let's assume she'll depend on this income for 20 years. Her husband should have a term life insurance policy of $600,000.

Annual Living Expenses ($30,000) x Years of Need (20) = Amount of Term Life Insurance required ($600,000)

Note: Plan for an increase in your income. If your spouse would depend on $30,000 a year now add an additional 20% to adjust for this and use the larger number. ($30,000 + 20% ($6,000) = $36,000)

Annual Living Expenses ($36,000) x Years of Need (20) = Amount of Term Life Insurance required ($720,000) *with extra 20%

Click here for Smart Money's term life insurance calculator

How long do I need term life insurance?

That's a great question! You only need term life insurance for the duration that your loved ones would depend on it. So get it when you are starting a family and have your first child. Get a 20 year term life insurance policy. Make it a part of your budget. After your 20 years are up then revisit it and see if you still need it. The odds are in your favor that you will not. Don't wait to get a policy. A physical exam is required and your rates may depend on it.

Rather than risk your money on a whole life insurance policy go with what you need. Buy a term life insurance policy that will protect your loved ones from financial hardship if you die. It's smart and you can do it once and forget about it. Just don't forget to make the annual payment! Finally, invest the money you saved from buying Term Life instead of Whole-Life insurance.

Craig Kelley

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Craig is the author of How to Get Out of Debt and an avid blogger. He strives to help people maximize their time and succeed financially as well as personally. He has been a leader in several start-up companies including Mokumax Virtual Domains & Servers, Inc. and currently HealthcareSupplyChain. Read more...

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