When shopping for life insurance, a consumer can buy either term life insurance or whole life insurance. It is important to understand these two types of life insurance policies – both their similarities and their differences. They both insure the life of the policy holder and provide compensation to a named beneficiary in case the insured dies. Being clear about the reason for buying insurance and having a basic understanding about the product can make the decision between buying term life and whole life insurance easier.
Term Life Insurance: As the name suggests, term life insurance lasts for a specific term that can vary as per the insured person’s need. This term ranges from one to thirty years but usually these policies are bought for 10, 20, 30 years. If you buy a policy at the age of 35 for a term of 25 years, then you are insured specifically till the age of 60 if pay your premiums regularly.
Whole Life Insurance: Whole life insurance offers the insured coverage for their entire life, irrespective of the age it is purchased (subject to not missing premiums). If a consumer buys a whole life insurance policy at the age of 35 and lives to be 100, the policy would still be valid after 65 years.
Difference between Whole Life and Term life Insurance:
Apart from the obvious and difference in the length of the policy, these policy types have are other material differences.
|Whole Life Insurance||
Term Life Insurance
|Since death is inevitable, the beneficiaries will receive payout of benefits from the policy when the death of the insured occurs.||The beneficiaries receive the insured amount only if the insured dies within the specified term. In case that does not happen, nothing is paid to the beneficiaries.|
|COST||Whole life policies are costlier, especially in the initial years, as they have an investment component.||Term life policies are less expensive when compared to whole life policies. If a policy is subsequently renewed, the premium can increase.|
|Combines investment with life insurance coverage. These policies have a cash/investment component that keeps growing and is added to the death benefits. In the initial years, the face value is higher than the cash value. If the insured surrenders the policy before death, the insured receives the cash value.||There is no investment component and the beneficiary is entitled only to the death benefits also known as the face value of the policy.|
|TAX||Interest portion is tax deferred||Generally not taxed|
|LOANS||Policy can be used as a collateral for loans||No loans are possible against these.|
|VARIATIONS||Possible forms Include traditional whole life, survivorship policy, universal whole life policy and variable whole life policy etc.||Very little choice. It can be renewed or can converted into whole life insurance.|
|SUITABILITY||Suitable if insurance requirements will last for the entire life. Helpful in estate planning.||Suitable when the insured requires insurance only for a specific period (eg. until a mortgage is repaid or children finish college).|
Choosing the right insurer is as important as choosing the right product; make sure you choose a reputable and financially stable insurance company. Before buying life insurance, take time to learn about the policy, ask for illustrations and shop around to get the best quote. Do not get distracted by the frills and riders. They are incidental and are not the actual reason for buying insurance.