While there are numerous types of life insurance available, all of them can be categorized as being either temporary life insurance or permanent life insurance. All term life insurance policies are considered temporary in nature, as you are purchasing life insurance only for a specified time. Whole life insurance is a popular version of what is intended to be permanent life insurance, in that your initial policy is designed with maintaining the policy for your lifetime.
Identification
The most notable difference between term life and whole life insurance is the duration of the policy. With any variation of a term life policy, the coverage will end at a specified date. Term life insurance policies may be for terms up to 30 years but do have an expiration date. Whole life insurance policies do not have an end date and coverage will continue as long as the premiums are paid and the policy is not surrendered.
Function
Both types of life insurance are designed to provide financial support in the event of the policyholder's death, but the similarities essentially end there. A term life insurance policy's only function is to protect an individual's family in the event of their death, while a whole life policy is also designed to be an investment tool, as a portion of the insurance premiums are invested by the insurance company, allowing your policy to build a cash value. The cash value of your whole life policy is something you can borrow money against or request to be paid to you.
Considerations
A term life insurance policy will be cheaper than a whole life policy, especially in the beginning. But the trade-off is that term life insurance policies do not build any cash value and when they expire, you will be left without any life insurance. If you purchase a new term policy following the expiration of your earlier term life policy, your premiums will be higher due to your advanced age.
Types
Both term life and whole life insurance policies come in a number of variations, which give potential buyers more choices to find the right policy. Popular term life insurance variations include return of premium, where the policyholder receives back their premiums if still alive when the term expires; decreasing term, where the premiums remain constant, but the face value of the policy drops as the policyholder increases in age; and level term, which is the most common form of term life insurance. With level term life insurance, your premiums and death benefits remain the same for the duration of the policy. Among the variations in whole life insurance are participating whole life insurance, in which the policyholder can earn dividends if the life insurance company does well financially; level premium whole life, in which premiums remain constant as long as the policy is in force; and limited payment whole life, in which premium payments are made for a certain duration, such as 20 years or until the policyholder turns 65, but the premiums are enough to cover the cost of the policy for the policyholder's lifetime.
Potential
One aspect of buying life insurance that can make your decision whether to purchase term life or whole life a bit easier is that you're not necessarily stuck with the one you initially choose. Many life insurance companies will let term life policyholders switch to a whole life policy without providing proof of good health. Whole life policyholders who would like to switch to a term life policy can simply surrender their whole life policy and purchase a term life policy.
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