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Term vs Whole Life Insurance

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Term vs Whole Life Insurance

If you’re shopping for life insurance, there are two main types you’ll likely encounter: term life insurance and whole life insurance.

Depending on who you talk to, you’ll hear different arguments for and against both types, which can make it difficult to figure out which type of life insurance will provide the right protection for you and your family.

This guide breaks it all down so that you can make the best decision for your specific situation.

What Is the Purpose of Life Insurance?

Before getting into the debate over term versus whole life insurance, let’s take a step back and remind ourselves why life insurance is important to begin with.

While there are some rare exceptions, life insurance primarily serves one main purpose: to provide financial protection to people who are financially dependent upon you.

In other words, life insurance makes sure that there will always be money available for the people who depend on you financially, even if you’re no longer there to provide for them.

A good example of this is a couple with young children. A toddler obviously cannot support herself financially, and life insurance makes sure that there would be financial resources to care for her no matter what happens to the parents.

Other examples of financial dependents might include a spouse who would struggle to handle all the bills on his or her own, or parents who have co-signed for your student loans.

So before you start thinking about which type of life insurance you need, ask yourself the following two questions to better understand why you’re getting life insurance at all:

  1. Is there anyone who would struggle financially without your support? If not, you probably don’t need life insurance.
  2. If so, for how long will they be dependent upon you? Is it a fixed time period or is it relatively permanent?

Your answers to those questions will help you sort through the term versus whole life insurance debate with a clearer, more personal viewpoint.

The Basics of Term Life Insurance

Term life insurance is coverage that lasts for a set amount of time, typically 5-30 years. Once that period is up, the policy expires and your coverage ends.

That expiration may sound like a problem, but it’s actually similar to most other types of insurance. Things like auto insurance and homeowners insurance are typically annual policies that have to be renewed each year, and you would cancel your coverage if you no longer had a need. Similarly, term life insurance is meant to provide coverage only for as long as you actually need it.

Let’s look at the pros and cons.

The Benefits of Term Life Insurance

It’s Inexpensive

Term life insurance is typically the most cost-effective way to get the protection you need. In fact, it’s often 10 times less expensive than whole life insurance for the same amount of coverage, especially if you’re relatively young and healthy.

The main reason for the price difference is that term life insurance eventually expires, meaning it has a smaller chance of paying out. And again, that may look like a downside, but…

The Coverage Period Lines Up with Your Need

Most people only have a temporary need for life insurance. Your kids will eventually grow up and be self-sufficient. Your spouse can eventually rely on retirement savings and Social Security income. Your joint debt will eventually be paid off.

Term life insurance provides financial protection for the amount of time that you need it and no more. You should hope it doesn’t pay out, because that just means that you didn’t die early. Like your car insurance, it’s good to have in case of an emergency, but the best case scenario is never having to file a claim.

In addition, if for some reason your situation changes and you no longer need life insurance, you can simply cancel your term life insurance policy and be done with it. Again, it’s coverage for as long as you need it and no more.

It’s Easy to Shop Around

Term life insurance policies are fairly simple and therefore pretty generic. As long as you’re looking at insurance companies with a strong financial rating, you can largely shop on price alone.

My two favorite sites for comparison shopping for term life insurance policies are PolicyGenius and Term4Sale, both of which only list policies from reputable companies.

For example, using the Term4Sale quote engine, a 34-year-old nonsmoking male in New York City with “Preferred” health status could get a $1 million 30-year term life insurance policy for as little as $939.98 per year or as much as $1,255.30 per year. And again, because term life insurance is fairly generic, you can compare those premiums with the confidence that your policy would be just as good either way.

You Can Typically Convert to Whole Life

What happens if you end up needing life insurance coverage longer than you originally thought? Since term life insurance eventually runs out, wouldn’t that be a problem?

It is a risk, but most term life insurance policies allow you to convert your policy to whole life insurance without medical underwriting as long as you do it before the policy expires. Your premium would increase significantly upon such a conversion, reflecting the increased liability the insurance company is taking on by providing permanent coverage. And if for some reason your policy did require medical underwriting at the time of conversion, there would be the risk of an even bigger premium increase if your health has declined since you originally got the policy.

Not all policies have this conversion feature, but those that do remove the risk that you wouldn’t be able to get permanent coverage later on if you need it.

The Downsides of Term Life Insurance

It’s More Expensive as You Get Older

Term life insurance is typically inexpensive if you’re relatively young, but it gets more expensive as you get older, especially if you’re looking at policies with longer terms. And the reason is simply that your odds of dying increase as you age, which means the insurance company faces a bigger risk.

For example, a 54-year-old male looking for the same $1 million, 30-year term life insurance policy we mentioned above is looking at an annual premium of $5,894 to $6,780 per year.

If you’re in your 50s or above and looking for life insurance, a term policy may or may not end up being a cost-effective way to get it.

It May Not Last as Long as You Need

Life is hard to predict, and it’s certainly possible that you end up needing life insurance for longer than you originally expected. If that happens, your term life insurance policy likely won’t have a lot of flexibility that allows you to extend it, beyond converting it to whole life.

There are also some insurance needs for which permanent protection is simply better. Those are rare, but we’ll talk about them below.

The Basics of Whole Life Insurance

Whole life insurance has two primary features:

  1. It provides permanent coverage, meaning that it will never expire as long as you continue to pay the premiums.
  2. It includes a savings component that builds up over time and can eventually be used for a variety of purposes.

There are several types of whole life insurance that have slightly different features and serve different purposes, like universal life insurance, variable life insurance, and equity-indexed life insurance. For the purposes of this article we’ll focus on the basic whole life insurance that most people will come across, and for the most part, all of the following pros and cons would apply no matter which type you’re talking about.

The Benefits of Whole Life Insurance

It Can Handle a Permanent Need

If you have a permanent or indefinite need for life insurance, whole life insurance is the way to get it.

For example, if you have a child with special needs who will likely be dependent upon others for his or her entire life, whole life insurance may make sense. Or if you will have multiple millions of dollars to pass on to your heirs, whole life insurance can help with estate taxes and preserve your family’s wealth.

Most people don’t have these kinds of permanent needs, but if you do, then whole life insurance can be valuable.

It Can Be a Form of Forced Savings

For people who struggle to consistently save money, whole life insurance can be a way to force yourself to build long-term savings while also providing financial protection.

It may not be the most efficient savings account, as we’ll talk about below, but having some savings is better than having none, and the savings you do accumulate can be withdrawn for any reason. Taxes are also deferred while the money is inside the account, which can be a benefit for high-income earners who have already maxed out their other tax-advantaged savings accounts.

It’s Can Be Structured to Meet Your Goals

If you work with a life insurance professional who really knows what they’re doing, you can specially structure a whole life insurance policy to serve specific purposes.

For example, if your main goal is permanent life insurance protection, you can structure it to minimize the savings component and make that protection as cheap as possible. If your main goal is to build savings, you can structure it to minimize other costs and front-load your contributions to grow your savings as quickly as possible.

If you can find a life insurance agent who’s willing to work with you in a fiduciary capacity, meaning they put your interests ahead of their own, you can get fairly creative and structure your whole life insurance policy to meet your specific needs.

The Downsides of Whole Life Insurance

It’s Expensive

Whole life insurance is an expensive way to get the financial protection you need. For example, remember the 34-year-old male who would pay $939.98 per year for a $1 million 30-year term life insurance policy? According to LLIS, a team of independent insurance advisers, a $1 million whole life insurance policy for the same individual would be $11,240 per year. That’s 12 times more expensive for the same amount of coverage. (Though, to be fair, for a longer coverage period.)

There are also a lot of hidden fees that add to the cost, from the sizable commission paid to the agent who sells you the policy to the management fees associated with the policy’s savings account.

Unless you truly have a permanent need for coverage, whole life insurance is probably not the most cost-effective way to get it.

Most People Don’t Have a Permanent Need

The simple fact is that most people don’t have a need for permanent life insurance coverage. As your children age and your savings grow, the financial impact of your death decreases until there’s little to no risk.

It might be nice to know that whole life insurance will eventually pay out, but is that something you need? And if not, is it worth paying those big premiums over all those years instead of putting that money elsewhere?

Don’t be fooled into thinking that your insurance has to pay out for it to be valuable. If you don’t have the need for permanent coverage, you shouldn’t pay for it.

It’s Not an Efficient Savings Vehicle

The savings component of whole life insurance might sound attractive, but the truth is that it’s not an especially efficient way to save money.

It takes a long time for the cash value to build up. It’s often 7-10 years just to break even, and even over long periods of time in the best of circumstances the return is likely to be low.

Not only that, but withdrawals from your account are actually loans, meaning you’re typically charged interest for the right to use your own money. Can you imagine if your savings account at the bank charged you interest each time you took money out?

Finally, unlike other savings accounts where you can simply decide to pause or decrease your contributions for a while if you hit a rough patch, your whole life insurance premiums are due like clockwork no matter what. Your policy can lapse if you fail to pay your premiums, losing you both the protection you need and the savings you’ve built up.

The truth is that unless you’ve already maxed out all your other tax-advantaged savings accounts — like your 401(k), IRAs, health savings accounts, and 529 accounts — the tax benefits of saving within a life insurance policy likely aren’t worth it. And even then you may be better off using a taxable brokerage account, depending on your specific goals and circumstances.

Which Type of Life Insurance Is Right for You?

If you’re purely looking for the financial protection that life insurance provides, and if your need is temporary, then term life insurance is likely the best option for you. It’s the cheapest way to get the protection you need, leaving more room in your budget for your other goals and obligations.

And for most people, quite honestly, that’s the end of the discussion. Most people don’t have a need for permanent coverage and will be better off putting their savings elsewhere, like regular savings accounts for short-term needs and dedicated retirement accounts for long-term investments.

But there are a few situations in which some kind of whole life insurance can make sense.

If you have a truly permanent need for life insurance, such as a child with long-term special needs, then a whole life insurance policy specially designed to provide the protection you need at the lowest cost possible may be well worth it.

And if your income is very high and you’re already maxing out all other tax-advantaged investment accounts, a whole life insurance policy can be a way to get some additional tax-deferred savings. Again, you’d ideally want it to be specially designed to minimize fees and maximize the amount that goes toward savings.

In any case, remember to focus on the reason why you’re getting life insurance in the first place and to make decisions around that need. The right type of life insurance will likely be pretty clear as long as you keep your personal goals at the forefront.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Life Events, Pay Down My Debt

23 Ways to Get an Engagement Ring Without Going Into Debt

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

23 Ways to Get an Engagement Ring Without Debt

A marriage proposal can lead to much happiness, but it also can mean having to purchase an expensive engagement ring and, subsequently, getting into debt. If the diamond industry has anything to say about your engagement ring purchase, you’ll spend anywhere from one to three months’ salary on a diamond engagement ring. On average, couples spent $4,000 on engagement rings in 2012, according to a 2013 report from Jewelers of America.

However, a little forethought and some creativity can lead to significant savings and even a debt-free engagement ring. Think of it this way: It can be far more romantic to propose with a paid-for ring than to drag the equivalent of a car payment into your marriage. Here’s how you can purchase that ring without breaking your bank.

Set a budget

1. The first step you should take in the ring-buying process is setting a realistic budget for yourself. Don’t just go shopping with no maximum price in mind, as that may lead to you making a purchase you can’t really afford. If you know what you want to spend beforehand, and make sure you stick to that, you are already showing the kind of discipline that can help you avoid serious debt.

Heirlooms are a wallet’s best friend

Jewelry passed from generation to generation denotes sentimentality and fiscal prudence. Ask your family, or your future spouse’s family, if they have any heirlooms they would like to pass on. Keep in mind: Heirloom jewelry will be free, but the service and upgrades can run from a few hundred to several thousand dollars. If you do obtain an heirloom ring, consider these three options.

2. Leave the ring intact (except for resizing and repair).

3. Create a new setting for an heirloom diamond.

4. Incorporate a new band into the old ring design.

Buy your diamond on the cheap-ish

Real diamonds are never truly inexpensive, but knowing what and when to buy can save you a bundle.

5. Shop in the summertime. Because winter proposals are very popular (think Valentine’s Day), it can make a lot more financial sense to buy your diamond in the off-season. The summer months can offer stable pricing at a discount.

6. Buy diamonds shy of critical weights. If you want a full-carat diamond, look for something around .9 carats instead. You’ll get close to the same look at a nice discount.

7. Look before you buy. Compare diamonds at various areas of the color and clarity spectrum. If you can’t tell the difference in the diamond’s appearance, choose the less-expensive option. Also, be sure to comparison shop at different retailers; don’t just go with the first ring you love, as you may find something very similar, for less, at another shop.

Replace the diamond, save the difference

Thanks to the diamond industry’s multi-decade, multi-billion dollar advertising campaign, diamonds remain the most popular stone in engagement rings, but forgoing the traditional gem can save you thousands. Consider these emerging trends.

8. Choose synthetic diamonds. Diamonds created in labs share the same properties as mined diamonds, but they cost up to 75% less than traditional diamonds, and they are a great choice for those seeking to avoid conflict diamonds.

9. Replace a diamond with moissanite. A gemologist will never tell you this, but moissanite (a synthetic material) is the hardest gemstone used in jewelry next to diamonds, and it ranks high on clarity and color scales, too. It’s not a valuable gem, but it is beautiful. (Pro tip: Ask your future spouse before you go this route. Many people do prefer authenticity.)

10. Pick an alternative gemstone. Pearls or jade are popular choices outside of the United States, and garnet and topaz are gaining popularity stateside. If you want something out of the ordinary, consider alternative gemstones, but be aware that some gemstones are actually even more expensive than diamonds.

11. Skip gemstones altogether. Ornamental rings (especially knots) are popular choices for those who want to skip traditional gemstones. Handcrafted gold rings can be purchased for as little as $200 on Etsy.

Forgo tradition

Some of the best ways to save money on engagement rings involve breaking tradition, and some couples are more open to an alternative ring style than others. These are a few ring choices that definitely buck tradition.

12. Wooden rings: Wooden engagement rings occupy a large niche in the market, and can be a cost-effective alternative to precious metals. Wooden rings run anywhere from $50 for simple bands to several thousand dollars for rings that include ornate details and gemstones.

13. Tattooed rings: Some couples chose to get tattoos instead of rings, citing that nothing says forever quite like a tattoo. Keep in mind that this may be a dangerous option, as you will have a much harder time removing a tattoo than a ring if your relationship ends (either before or after the marriage).

14. Leather rings: Leather rings can include braiding, engraving and colored beads, among other stylings, and will certainly save you a bundle compared to a diamond. If you don’t want to go with real leather, faux leather can work as well.

15. Go dutch. If the ring in question is outside of your price range, consider asking your sweetheart to split the cost with you. As you’ll be combining finances after you’re married, this may actually lead to some great money-focused conversations.

Save money now, upgrade later

If your partner has a big diamond taste, but you’ve got a small budget, then consider upgrading later on. Here’s how.

16. Propose with costume jewelry. If you think you can save up for the real ring by the time of your wedding, an inexpensive piece of costume jewelry may be just right for the proposal.

17. Build as you go. Start with a simple band and stone, and add more or bigger gems for anniversary milestones, or upgrade when you can afford it.

Buy used

Consider buying a ring that already has a history. You can have the ring professionally cleaned to give it new beauty and make it “yours.”

18. Visit pawn shops. You may be buying the ring of a recent divorcee, but the savings can be irresistible.

19. Search estate sales. If you regularly shop estate sales, you might uncover a vintage ring at a spectacular price. Rings that aren’t presented with a certificate of authenticity will give you room to negotiate on price, but you may accidentally buy overpriced junk. This technique is best for people with an eye for authenticity.

20. Shop on eBay. Pre-owned rings from eBay can represent about a 30% discount over identical new rings, and many owners provide certificates of authenticity.

Creative ways to get cash

Whether you’ll spend a few hundred dollars or thousands, an engagement ring doesn’t have to mean big debt. Consider a few creative ways to save the cash you need to pay for a ring in full.

21. Sell your memorabilia. Your partner may not be too enthusiastic about your KISS memorabilia, or your 27 signed hockey jerseys. Selling these to help pay for an engagement ring will be a double sign of your love.

22. Save up, way in advance. If you’re not currently in a serious relationship, but you think you’re the marrying kind, consider setting aside some cash for a future ring purchase. While some people may find this a strange thing to do, there is no harm in being over-prepared. If you don’t end up using the money to buy a ring, it will be on-hand for other potential purchases (think a wonderful vacation, or a luxury item you really want).

23. Get a side hustle. People are increasingly taking on side hustles to earn extra cash, even if they have full-time jobs. This can include selling your artistic creations on Etsy, becoming an Uber or Lyft driver or writing freelance articles. Then you can put all the extra money you earn into an account for a ring.

Consider a personal loan

It is definitely ideal to be able to purchase an engagement ring without going into debt at all. However, if you simply have to finance at least part of the ring’s purchase, you might consider a personal loan, as you may be able to get a better interest rate than with a credit card, depending on your own credit and where you are able to obtain your loan.

Bottom line

Getting married can be an expensive undertaking, and you don’t want to put yourself in a difficult financial place just by purchasing the engagement ring. Keep in mind the alternatives to the traditional pricey diamond, and also remember that the love you share with your partner should be far more important than buying a ring with a sky-high price tag. Avoiding debt as much as you can also means you’ll be starting off your new marriage on a financially healthy note.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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Life Events, Mortgage

What Is Mortgage Amortization?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Getty Images

One of the biggest advantages of homeownership versus renting is each mortgage payment gradually pays off your mortgage and builds equity in your home. The difference between your home’s value and the balance of your loan is home equity, and your equity grows with each payment because of mortgage amortization.

Understanding mortgage amortization can help you set financial goals to pay off your home faster or evaluate whether you should refinance.

What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments over a set period. The interest you pay is based on the balance of your loan (your principal). When you begin your payment schedule, you pay much more interest than principal.

As time goes on, you eventually pay more principal than interest — until your loan is paid off.

How mortgage amortization works

Understanding mortgage amortization starts with how monthly mortgage payments are applied each month to the principal and interest owed on your mortgage. There are two calculations that occur every month.

The first involves how much interest you’ll need to pay. This is based on the amount you borrowed when you took out your loan. It is adjusted each month as your balance drops from the payments you make.

The second calculation is how much principal you are paying. It is based on the interest rate you locked in and agreed to repay over a set period (the most popular being 30 years).

If you’re a math whiz, here’s how the formula looks before you start inputting numbers.

Fortunately, mortgage calculators do all the heavy mathematical lifting for you. The graphic below shows the difference between the first year and 15th year of principal and interest payments on a 30-year fixed loan of $200,000 at a rate of 4.375%.

For the first year, the amount of interest that is paid is more than double the principal, slowly dropping as the principal balance drops. However, by the 15th year, principal payments outpace interest, and you start building equity at a much more rapid pace.

How understanding mortgage amortization can help financially

An important aspect of mortgage amortization is that you can change the total amount of interest you pay — or how fast you pay down the balance — by making extra payments over the life of the loan or refinancing to a lower rate or term. You aren’t obligated to follow the 30-year schedule laid out in your amortization schedule.

Here are some financial objectives, using LendingTree mortgage calculators, that you can accomplish with mortgage amortization. (Note that MagnifyMoney is owned by LendingTree.)

Lower rate can save thousands in interest

If mortgage rates have dropped since you purchased your home, you might consider refinancing. Some financial advisors may recommend refinancing only if you can save 1% on your rate. However, this may not be good advice if you plan on staying in your home for a long time. The example below shows the monthly savings from 5% to 4.5% on a $200,000, 30-year fixed loan, assuming you closed on your current loan in January 2019.

Assuming you took out the mortgage in January 2019 at 5%, refinancing to a rate of 4.5% only saves $69 a month. However, over 30 years, the total savings is $68,364 in interest. If you’re living in your forever home, that half-percent savings adds up significantly.

Extra payment can help build equity, pay off loan faster

The amount of interest you pay every month on a loan is a direct result of your loan balance. If you reduce your loan balance with even one extra lump-sum payment in a given month, you’ll reduce the long-term interest. The graphic below shows how much you’d save by paying an extra $50 a month on a $200,000 30-year fixed loan with an interest rate of 4.375%.

Amortization schedule tells when PMI will drop off

If you weren’t able to make a 20% down payment when you purchased your home, you may be paying mortgage insurance. Mortgage insurance protects a lender against losses if you default, and private mortgage insurance (PMI) is the most common type.

PMI automatically drops off once your total loan divided by your property’s value (also known as your loan-to-value ratio, or LTV) reaches 78%. You can multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled.

Find the balance on your amortization schedule and you’ll know when your monthly payment will drop as a result of the PMI cancellation.

Pinpoint when adjustable-rate-mortgage payment will rise

Adjustable-rate mortgages (ARMs) are a great tool to save money for a set period as long as you have a strategy to refinance or sell the home before the initial fixed period ends. However, sometimes life happens and you end up staying in a home longer than expected.

Knowing when and how much your payments could potentially increase, as well as how much extra interest you’ll be paying if the rate does increase, can help you weigh whether you really want to take a risk on an ARM loan.

The bottom line

Mortgage amortization may be a topic that you don’t talk about much before you get a mortgage, but it’s certainly worth exploring more once you become a homeowner.

The benefits of understanding how extra payments or a lower rate can save you money — both in the short term and over the life of your loan — will help you take advantage of opportunities to pay off your loan faster, save on interest charges and build equity in your home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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