Term vs. Whole Life Insurance

There are two main types of life insurance policies available on the market today – term life insurance policies and permanent (whole) life insurance policies. While the majority of people can benefit from a term life insurance policy, there are some situations in which a whole life insurance policy would be more advantageous. However, in order to understand which type of life insurance policy would best suit your needs it is important to consider the following information pertaining to the differences between term and whole life insurance, the types of term and whole life insurance policies available, and how to choose a policy type after assessing your insurance needs.

What is the Difference Between Term and Whole Life Insurance?
The primary difference between term and whole life insurance policies is the amount of time during which coverage is provided. With a term life insurance policy coverage is only provided while the policyholder is paying their monthly premium, which they are obligated to do for a specific time period (usually ranging from 10 to 30 years) in order to keep their life insurance policy active. On the other hand, a whole life insurance policy is basically a term policy with an additional investment component (typically in the form of bonds, stocks, or money market instruments). This additional investment component adds a gradually increasing cash value to the policy, which can be borrowed against by the policyholder. Since whole life insurance policies provide this additional investment component, they usually require more expensive monthly premiums and term life insurance policies.

Different Types of Term and Whole Life Insurance Policies
There are three main types of term life insurance policies:

  • Level Term – This type of policy guarantees a fixed premium for up to two decades, thereby protecting the policyholder from the negative effects of unexpected economic changes and inflation.
  • Decreasing Term – this type of policy is highlighted by a gradually decreasing death benefit.
  • Annual Renewable Term – allows the policyholder to renew their policy on annual basis, however this convenience is paid for by steadily increasing premiums.

There are also three main types of whole life insurance policies:

  • Universal – with a universal life insurance policy a portion of the monthly premium is put towards a cash account, which the policyholder can borrow against at any time.
  • Variable Universal – a variable universal life insurance policy also provides a cash value, however rather than earning a set interest rate on this fund, the policyholder can invest it in a variety of investments such as stocks, mutual funds, and money market products.
  • Whole Life – this type of policy is specifically intended to provide coverage for an individual throughout the duration of their entire life.

Choosing an Insurance Type Based on Your Needs
Since whole life insurance policies tend to have much more expensive monthly premiums, it is important to assess whether or not such a comprehensive insurance type is needed. Some insurance experts recommend that prospective policyholders under the age of 40 choose term life insurance, as it is more affordable, yet provides adequate death benefit coverage. On the other hand, older individuals that are more likely to outlive their insurance policy may want to guarantee a death benefit for their loved ones by choosing a whole life insurance policy instead. Even still, individuals that want to have more control over how their life insurance cash fund is invested may want to consider variable universal life insurance, as this type of policy will allow them to choose stocks, bonds, and money market products when investing their life insurance cash reserve.

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