Whole and Term Life Insurance: Understanding the Difference
Types of Life Insurance
There are two general types of life insurance, whole and term insurance. Whole life insurance is generally designed to be a lifelong benefit, with flat rates throughout the use of the benefit. Term insurance is intended to be used for a certain length of time and the rates generally change as the policyholder ages.
Key Differences
Whole life policies have a cash-out option, which allows them to be used as an investment. The cash value is guaranteed, depending on the type of whole life policy purchased and the length of time it is held.
Unlike whole life, term policies do not include a cash option. This type of policy is not designed to be held indefinitely. Term insurance (as its name suggests) is designed to be held for a certain term. For example, a parent may wish to purchase a term policy while his or her children are young and maintain it until they are living independently so they know their family will be taken care of should they pass away.
The policyholder may have to pass insurability standards as they renew their term insurance since term insurance is only sold in various increments (10 years, 20 years, etc.), whereas a whole life plan will not require this as long as the same policy is maintained.
Why Term Insurance?
At first glance, whole life may appear more appealing than term insurance. However, term policies are preferred by many consumers because they are generally much less expensive than whole policies. This allows the insured to gain the coverage they desire for a much lower rate. The capital that would have been used to fund a more expensive whole life policy can potentially be invested at a higher rate of return than the whole life policy would have provided. Whole life insurance is considered a good investment only when the insured is unable to invest successfully elsewhere. For example, if a person is always withdrawing their savings account money for various things that inevitably come up.
Published by Tiffany Bradford
I am a business major currently working full-time in finance. I hope to break into full-time freelance writing at some point in the future, but for now it's an great hobby with the bonus of extra pay. View profile
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9 Comments
Post a CommentCash value in a whole life or other permanent policy is not, I repeat, NOT designed for the purpose of savings or investment. It is designed to cover the increasing mortality expense as the insured ages. Anyone who sells whole life as a retirement savings tool is likely doing his client a disservice (although there are applications where the superb tax advantages of cash value policies can be useful for this purpose, but usually not whole life). All life insurance policies within a company are priced actuarially identical. Term life insurance is "cheaper" because it is designed to almost never pay a death benefit (less that one percent do). Permanent policies, if kept in force, always do. That's why, contrary to popular belief, term is a company's most profitable product and whole life is the least.
Useful information. I was once licensed as an insurance agent. I never sold a policy. LOL. I passed the test on the first try, but still don't get it. Thanks for the good article.
Excellent job on a very confusing subject.
Thanks for explaining a confusing subject. Good job.
Very informative. Thank you for the lesson.
I use to sell life insuracne. Thanks for the refresher.
Dahloan
Very interesting and wonderfully written. This is very important information, thanks for sharing!
great article, great info, great writer!!
Very interesting article with great facts. Thanks for sharing the info...