There are two main classifications of life insurance: term and whole. Whole life insurance may also be called ordinary life insurance. The chief distinction between the two classifications of life insurance is the period of time the policy remains in force. So long as the premiums are paid when due, whole life insurance remains in force for the whole, or entire, life of the insured. Term insurance remains in force for only the term specified in the insurance policy.
Function
The function of any insurance policy is protection against financial loss. In the case of life insurance, that function is financial protection against the untimely death of the person who is insured. The proceeds of a life insurance policy may be used in a variety of ways, from mortgage payments to funding educational expenses, or from medical care to daily living expenses.
Time Frame
Term insurance is written for a finite term or period of time. Term insurance is often purchased for a period of time that coincides with the length of a large indebtedness, such as the mortgage on a primary residence. Term life insurance expires at the end of the term or the death of the insured, whichever event occurs first. Whole life insurance is written to cover the entire length of life of the insured and does not expire so long as the premiums are paid according to policy terms.
Premiums
The premiums for a term life insurance policy are generally less than the premiums for a whole life insurance policy, although premiums may increase as you grow older. Much like car insurance, you receive only coverage in exchange for your term life insurance premiums. A term policy builds no equity or cash value. On the other hand, whole life insurance policy premiums are generally more and may not increase. However, a whole life policy builds equity or cash value, and you or your beneficiaries will receive some payment from the whole life insurance policy.
Considerations
Many term life insurance policies have decreasing benefits. The longer the term, the less money is paid. In the case of a term policy written to cover a large indebtedness such as a mortgage, the amount of the policy proceeds declines as the amount of the mortgage outstanding declines. With a whole life policy, the entire face amount of the policy, less any amounts withdrawals such as loans, will be paid whenever the benefits become payable.
Savings
Because a whole life insurance policy builds cash value, many people look upon such policies as a vehicle for saving money for their future and/or retirement. When considering such a purchase, be sure to consider interest rates and expenses. Depending on your needs and circumstances, another savings vehicle such as an IRA or annuity may be a better purchase.
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