There are dozens of different life insurance products that are fine-tuned for particular target markets, but they all fall into two general categories: Term Insurance and Permanent Insurance. Here we will explain the basic differences between Term Insurance versus Whole Life Insurance.
Term Life Insurance
Term life insurance is basic life insurance, the kind you’d most likely think of if somebody asked you to explain the concept. You pay a premium, and in return, the insurer guarantees to pay your beneficiary a lump sum of money if you die while the policy is in effect.
Term policies are sold for specific lengths of time (called the “term”), usually between 5 and 30 years. Once the term policy expires, you stop paying premiums and the policy is no longer in force.
Most companies will, however, offer a renewal policy for a one or five year period at a rate that is based on your age at renewal. Although a basic term policy provides only a death benefit, most insurers offer several insurance riders that allow the policyholder to broaden their coverage and have living benefits as well.
Some of the riders that are available are:
- Accelerated Death Benefit: This benefit provides for the company to pay a portion of the death benefit to the insured if he or she is diagnosed with a terminal illness that is likely to cause death within two years.
- Accidental Death Benefit: This rider provides for the insurer to pay a multiple of the death benefit (usually double) if the insured dies as a result of an accident.
- Children’s Term Rider: The Children’s Term Rider allows the policyholder to insure all children and future children born or adopted to the policy for a time period designated by the insurer.
- Waiver of Premium Rider: The Waiver of Premium rider provides for the insurer to waive periodic premiums if the insured becomes disabled and is unable to work.
- Return of Premium Rider: The Return of Premium rider provides for the insurer to refund all premiums paid to the company if the insured outlives the term of the policy. This refund is paid in a lump-sum and is non-taxable to the policyholder.
Term Insurance Advantages and Disadvantages
- Term insurance is the most affordable type of life insurance.
- Term policies are easy to understand, so you need not be concerned with hidden fees, exclusions, or tax liability.
- You can cancel or convert a term policy before it expires.
- When the policy expires, so does your insurance coverage.
- To continue coverage before the policy expires, you will have to pay the renewal premium, purchase a new policy, or convert the policy to a permanent one.
Whole Life Insurance
Whole life insurance is considered permanent because the policy will stay in force over your lifetime as long as the periodic premiums are paid. The policy has a cash value component that earns an interest rate stated by the company. As the cash value account accumulates, these funds can be accessed by the policyholder through policy loans that can be used for any purpose. The policy loans can either be paid back or deducted from the death benefit when the policyholder passes away.
Whole Life Insurance Advantages and Disadvantages
- The whole life death benefit is guaranteed for the life of the insured.
- The established periodic premium cannot be changed by the insurance company, even if the insured becomes very ill or when they get older.
- The insurance company cannot cancel the policy unless you do not pay the periodic premium. Only the policyholder can cancel the policy.
- The policy can be canceled by the insured, and the cash value returned.
- Whole life insurance costs significantly more than term insurance
- It’s more complicated to purchase since there are many ways to customize the policy to meet your specific needs.
How do I know which is Best for Me?
The type of life insurance you purchase and the amount you purchase will depend on you what you need the policy to do for you. The most popular reasons to buy one type or another are:
- If you need insurance to replace your income and pay for your family’s expenses, term insurance is usually the most practical purchase. Younger families that have significant debt because of a mortgage, auto loans, college tuition, and other expenses are likely to need a larger death benefit than middle age couples.
- If you need insurance to pay for final expenses that seniors are likely to have, such as funeral expenses, nursing home bills, or transferable debt, then whole life will be the better choice since it is guaranteed and will last a lifetime.
- If you desire to purchase lifetime coverage and earn additional interest on your cash value in order to accumulate a substantial cash for retirement purposes or other investment reasons, a whole life policy will be the better choice since most carries offer indexed whole life insurance policies.
Your Independent Agent Can Help
Since independent agents are allowed to represent multiple carriers with multiple insurance products, they will be able to offer the best advice and help you make an informed decision about term insurance versus whole life insurance An experienced and reputable independent agent can help you calculate your insurance needs and will then shop your policy with all the carriers they represent. This will enable them to deliver the most appropriate insurance solution that will meet your needs and fit within your budget.