In the realm of life insurance, there are two types of policies: whole life or term life. A term life policy often is a lower-cost alternative to whole life insurance chiefly because the whole life policy also contains an investment component. Determining whether term life insurance is the best option for you requires a thorough evaluation of the policy.
Benefits
Term life insurance is for a specific period of time, typically from one to 30 years. The policy is only paid out upon the death of the owner within the purchased time period. If the person's life exceeds the policy's duration, he or she receives no benefit and no money is refunded. The policy's benefit typically is dependent upon what a person pays; the higher the payout amount, the higher the cost for the life insurance policy.
Cost
A term life insurance policy is generally considered to be less expensive than its counterpart, a whole life insurance policy, for two chief reasons. The first reason is that term life insurance is, in some ways, a gamble. If you don't die during the policy's terms, your dependents don't receive a benefit. For this reason, these policies are not always paid out, which allows insurance policies to keep these costs lower. Secondly, whole life insurance features an investment component, which essentially acts as a savings account. This means the policy will pay out both the agreed-upon price as well as any earnings. This savings component makes whole life insurance more costly than term life.
Renewal
If a person outlives their term life insurance policy, it is possible to renew the policy. However, this is typically at a higher price. Because a person is inevitably older than when he first took out the policy, the person is more likely to pass away during the renewal period for the policy. Also, the cost of a term life insurance policy can vary and often increases over the life of the policy.
How Much Do I Need?
When considering the insured amount for a term life policy, there are a few factors to consider. The first is estimated funeral costs as well as any estate taxes or other costs associated with your death. The second is to what degree your dependents rely on your income to maintain their standard of living. For example, if you are the sole provider for your family, you should obtain a policy worth several years of your salary in order to protect your dependents from financial burden. Third, consider any long-term costs, such as education expenses, that your dependents would be responsible for were you to die. While there are other items to consider, these are the three major costs used to determine an appropriate term life policy.
Limits
Because of the time constraint considerations for term life policies, these policies often are renewable up to a certain age, typically age 75. However, at these limits (or should your financial or family situation change), many insurance companies allow conversion to a whole life policy, which are typically levied at a higher cost.
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