There are primarily two main forms of life insurance that you should understand: Whole Life Insurance and Term Life Insurance. Both these forms of insurances also offer numerous variations and options to choose from.
Let us review the term and whole term life insurance policy concepts one by one. Let’s split the whole term life insurance and compare whole life insurance vs term life insurance in order to determine the key differences between the two.
The main difference between term and whole life insurance is that with term life insurance, you are covered only during the life of the policy and while you are paying the premiums. If you carry a term life insurance policy for 50 years, keep regularly paying the premiums for that entire 50 years, and then quit paying and die a year later, your beneficiaries will not get anything from the insurance company for benefits.
Whole life insurance, in comparison with term vs whole life insurance, is designed to cover you for your entire life. The whole life insurance policies charge you a fixed premium each year, one that’s typically higher than term insurance. The advantage of whole life insurance is that while part of the premium covers what term insurance would cost, the surplus resides in an account that pays interest and accumulates a cash value. As this “accumulation account” grows, your premiums can decrease over time. Eventually in some cases, the interest earned can pay the premiums for you. So you will not be paying any more premiums, but you will still be covered for the rest of your life.
Continuing the comparison between term life insurance versus whole life insurance, let’s see the various forms insurances available in these two broad categories:
Forms of Term Life Insurance:
- Level term: You pay a fixed premium for up to 20 years. This can be a good deal, since it protects you against the effects of inflation and unexpected changes in your health that would warrant higher premiums.
- Annual renewable term: Gives you the option of renewing your policy regularly, but at increasing premium rates.
- Decreasing term: Features a steadily decreasing death benefit. This might seem undesirable, but it can be sensible for many people. You may need a bigger benefit when you’re a young breadwinner with a family to support than when you’re a retiree with grown children and a nice nest egg.
Forms of Whole Life Insurance:
The main problem with whole life insurance is that insurance companies tend to offer low interest rates to policyholders, while the companies typically earn much greater returns because they invest the money in stocks and bonds. Policyholders are indeed earning a bit of money through the policy, but as an “investment,” it leaves a lot to be desired.
This is where “universal” life insurance, a form of whole life insurance, comes in. With universal life, in years when the insurance company earns more on policyholders’ accumulation accounts than they first estimate, they pass along the extra gain. While his sounds good, because of overly optimistic assumptions insurers make about customers’ returns, customers can end up paying more than they expected to. “Variable” life insurance policies, which invest in sub-accounts that look like mutual funds (but legally are not and cannot be), carry the same danger.
Both with universal and variable insurance, the higher the initial assumed rate of return, the lower the annual payments will be.
Term verses whole life insurance is basically getting what you pay for. It is similar to paying a company to provide video surveillance for your home (term insurance) or buying an entire home video surveillance system (whole life – the equipment has a cash value). If you can think of the differences in these terms, that may be helpful. Review our other articles on The Biz Hunter that help to explain differences in insurance policies.