Life insurance allows you to protect your family's financial future should you die prematurely. Not only does it provide replacement income allowing your family to maintain the same standard of living after your death, but also your family can use the death benefit to pay last expenses, such as funeral costs and uncovered medical bills. Basically, there are two types of life insurance policies: term life and whole life. Understanding the differences between the two policies can help you make an informed decision about your life insurance needs.
Length of Protection
Term life insurance, which is designed to expire before the insured dies, provides temporary financial protection for the insured's beneficiaries. If the insured dies within the stipulated time period, normally between one to 30 years, the full death benefit is paid. If the insured dies after the stipulated time period, no benefits are paid.
Whole life policies, which are designed to provide permanent protection, will never cancel as long as the insured pays the premium. The beneficiaries receive the death benefit no matter how long the insured lives.
Uses
Purchased to cover a specific need, term life insurance only provides coverage for a certain number of years. New homeowners purchase term life insurance to ensure their family will have enough money to pay off the mortgage. Parents purchase term life insurance to cover their children's college educations. After the mortgage is paid off and the children have graduated from college, you may no longer need term life insurance.
Whole life insurance acts as a forced savings account and is often used to build an estate or to pay estate taxes. Because it builds up a cash value, whole life insurance is also useful in retirement planning.
Premium
Term life insurance is normally more affordable than whole life and has a small, initial premium that may increase dramatically if the policy is renewed after the initial, stipulated time period.
Whole life insurance, while more expensive, guarantees the premium remains the same throughout the lifetime of the policy.
Advantages
Because of its simplicity, term life insurance is easy for buyers to understand. Buyers can also renew or convert to a permanent life insurance policy without showing proof of insurability.
Whole life insurance guarantees the premium remains the same through the life of the policyholder and builds up a cash value that the insured can borrow against for loans or emergency use.
Disadvantages
Term life insurance does not build up a cash value, and, if the insured dies after the stipulated policy period, it does not pay out a death benefit. The insured can theoretically pay premiums on a term insurance policy for 30 years and never receive any money from the insurance company.
The savings component of whole life insurance can be complicated for buyers to understand and whole life insurance has a higher premium than term life. Also, according to GOInsuranceRates.com, the cash value of a whole life policy does not start to build up until after two to three years of continual premium payment and the cash value is not paid out in addition to the death benefit.
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