When it comes to life insurance, there is a time when we all need to consider taking it up. Understanding the different types of life insurance – term and whole life – helps us to choose what works best for us.
Whole life insurance is a broad term which covers a number of different aspects of insurance. For example, included under the banner of whole life insurance are traditional whole life insurance, universal life insurance, and variable/variable universal life. While whole life insurance policies tend to be more popular than term policies, there is no significant gulf between them, when it comes to sales.
It is also worth knowing that there are a number of variations when it comes to life insurance for individuals, and policies taken out for groups or – for example – a number of workers or affiliates.
So how do they compare?
Whole Life Insurance
Whole life insurance (also known as permanent insurance) is designed to pay out in the event of a policy holder’s death, regardless of age. The factors which govern the validity of a policy are determined by the type of policy undertaken. In permanent life insurance, there are a number of stipulations which must be met in order for a payout to be made. These terms and conditions, in addition to exclusions and limitations, are agreed to at the point of the sale of the said policy.
Traditional whole life insurance is underwritten on the basis that the insurance premium and the potential payout remain the same throughout the life of the policy. The way an insurance company structures the policy is that they will generally increase the cost per $1,000 with age, which increases significantly when the insured lives over the age of 80. The premium is generally pretty high in the early stages of a policy, while investing funds with the aim of supplementing the cost of those who live to later years, keeping the premium at a level throughout.
Once any contributions exceed a certain value, then the insurance company are obliged to offer a cash settlement as an alternative to policy holders that wish to cash out.
Term Insurance is a lot less complicated than its largest competitor. Generally covering a policy term of between one and thirty years, a term insurance policy only pays out in the event of death during a specified period. Typically, there will be no other benefits to term insurance policies other than the aforementioned.
There are two types of term insurance policies, which are level term (where the death benefit remains at the same level throughout the policy) and decreasing term (which sees a gradual decrease of the benefit in line with the age of the policy). The majority of term policies which are sold are level term. Decreasing term policies are typically cheaper, but can prove to be a poor investment in the long term. Once again, it will come down to personal choice.
Which policy suits you best? Think wisely, as it may be one of the most important decisions you ever make.