Term vs Whole Life Insurance

Whole Life vs Term Life Advantages Explained

Life insurance is a form of investment in one’s future in case they are not there to fulfill their financial obligations. It consists of a contract between the insured and an insurance company to pay a predetermined amount to the insured’s named beneficiary, so long as the premiums are current. Life insurance can be used to provide food, shelter, education for the children, or take care of any other financial obligation assumed by the insurer during their lifetime. If one is young and single and essentially free of obligations, they may consider waiting before buying a policy. However, some policies return significant dividends and interest over a lifetime, so it is advisable to buy as early as possible so the rates can be locked in.

Whole Life Insurance Benefits

While there are many different types of insurance policies available, the two most common ones are whole life insurance and term life insurance. Whole life policies, as the term implies, provide coverage for the entire life of the person insured. This type of policy has both insurance and an investment component built into it. The premiums paid are partially used to cover the administrative expenses, while the remaining is used towards the insurance and the investment portion of the policy. The investment component can be borrowed against or withdrawn by the policy holder, otherwise it accumulates in cash value. Withdrawing can, however, reduce or terminate the death benefit. Premiums can be paid throughout the insured person’s life or a portion like ten or twenty years. The interest on the investment part of the policy is normally tax-free until the time of withdrawal.

Whole life insurance has a number of benefits. One major benefit is that once purchased, the premiums are locked and do not rise for the life of the policy. The policy lasts for a lifetime, meaning that one does not have to go through the qualification process and medical examinations repeatedly. A part of the premium is invested on behalf of the individual on a long term basis and if when one is older, retired, or the death benefit is no longer needed, the policy may be cashed out. The drawbacks are that premiums are costly and not everyone can afford them. One can do much better by investing the savings portion of the premium payment on their own, because saving devices offering better tax breaks are available. Usually, it takes a minimum of ten years for these policies to accumulate any real cash value.

Term Life Insurance Qualities

Term life policies are the most straightforward and least expensive types of policies available. It is basic insurance without any cash value, which is most commonly available for terms of one, five, ten, and fifteen years. Should the insured individual die within the policy time frame, the beneficiary is paid the face value of the policy. Should the insured person live longer than the policy term, the policy expires and pays nothing. Many people find this type of policy more suitable as it provides the basic protection needed, while allowing them to invest their own money as they choose where they can get higher yields. When the policy expires, the individual must re-qualify by retaking the physical exam and completing other formalities.

Term insurance policies are usually suitable for young families because with growing children budgets are tight, yet coverage is needed to provide the family with security. Term life is good because it is cheap, so more coverage can be afforded and it is simple. It can be renewed whenever necessary, while one can build up their own savings in a way that is more suitable to individual needs. Term life policies can be compared to renting as opposed to owning. If the term is outlived, a lot of money is spent and there is nothing to show for it in return. Whole life policies, on the other hand, do provide a forced nest egg at the end of the policy, however small it may be. A newer policy option is now available that addresses the concept of “wasted” money. It is known as return-of-premium term life insurance, and it returns the premium paid at the end of the policy term, however, it costs 25% to 50% more than the conventional term policies.