Have you ever imagined what would happen to your family if you met an untimely death? What would happen to your family if you were the only income earner? Usually this question arises in the mind of every individual at some point it time in their life.
I have always been passionate about the life insurance industry because life insurance is for protecting your family financially from an untimely death. I am often asked what the difference between Term and Whole Life Insurance is so I thought I would take a minute and write about it.
What Is Insurance?
Insurance can be defined as a policy that protects you from the financial loses of an unforeseen emergency or loss. Money is paid for the “coverage” of a policy to protect the individual or beneficiaries for a certain amount of financial loss over a certain period of time. Choosing the right type and amount of insurance is an important decision that you must make.
The Insurance Company
The company that provides the insurance is called the insurance company and the person that buys the insurance is called the policyholder. The Claim adjuster is the person who submits the claim for the insured policyholder when loss is experienced.
Types of Life Insurance
Life Insurance falls under two categories:
- Term Life Insurance
- Whole Life Insurance
Term Life Insurance is typically a low cost solution and is easy to understand. On the other hand, Whole Life Insurance contains additional benefits. The premium for Whole life is typically higher than Term Life premiums, but a portion of the higher premium payment is applied to different features of the policy which have different benefits to the policyholder.
Term Life Insurance
As the name of the insurance implies, Term Insurance is coverage that is provided for a certain time period or “term”. The monthly premium for Term Insurance is typically based upon three factors; age, risk and length of time for the coverage. Term insurance only pays your dependent after you die prematurely. The policy has no value other than that your beneficiary receives the benefit after your death, as long as you die within the term coverage period.
Length of Term Insurance Policy
Term insurance typically range from 1 to 30 years. The most common term coverage length I typically see is 20 years. Once the term has expired a new policy must be put in place to cover any future period.
Features of Term Life Insurance
The Following are some of the features of Term Life Insurance:
- It provides the benefits only after your death.
- It is necessary that the term policy is in effect when you die.
- Buying this policy is quite easy and affordable.
- It can be purchased for a shorter duration such as 5, 10, 15 or 30 years.
- After you reach the age of 50, the premiums become more expensive.
- If you want to extent the coverage beyond the term length you may have to qualify for a new policy and the price may increase.
- It can be used as additional coverage along with the Whole Life Insurance or any other insurance for that matter.
Whole Life Insurance
One of the main differences between Whole Life Insurance and term is that whole life accumulates a cash value that is added as an investment component. Another feature of a Whole Life Policy is that you pay the same premiums and receive the same benefit for the duration of the policy this is sometimes referred to as a “level” premium.
Since whole life policies gain cash value over a period of time, it is possible to borrow against the policy.
Another common feature of whole life is that when the investment it is associated with qualifies for dividends the insurer’s financial gain improves the value of the cash value of the policy. With most insurance companies you can use these dividends to either decrease your premium or apply them to the cash value to earn additional interest. You can also take the dividends in the form of cash or you can also buy additional coverage.
Features of Whole Life Insurance
The following are some of the features of Whole Life Insurance:
- You are covered for your entire life (assuming you don’t cancel the policy).
- It provides cash accumulation in addition to the death benefits.
- You must qualify after a health examination.
- There are optional policies designed for those who have health issues.
- It can accumulate cash value.
- It can be used as part of an investment strategy.
- During the life of the policy you can borrow or withdraw the cash value.
I hope you find this information helpful in understanding the difference between Term Life Insurance and Whole Life Insurance.
Here’s to Your Success – Jody Humphrey