A life insurance policy is a way to ensure your dependents will be able to survive financially without you in the event of your death. While life insurance policies vary in terms of benefits and costs, they are designed to cover expenses such as funeral costs, education expenses, housing payments, lost salaries or other expenses your beneficiaries may be counting upon. The two most common life insurance policy types are whole and term life policies, and each has their distinct benefits and drawbacks.
Time Frame
Term life insurance lives up to its name in that the insurance lasts for a specific time period. For instance, term life insurance can last anywhere from one to 30 or more years, depending upon the policy a person has elected to purchase. If a person is still living beyond the policy's life, the policy can be renewed or a new policy may be purchased. However, a person may not be able to renew the policy beyond a certain term because the insurance company is less likely to insure an older or chronically ill person. By contrast, a whole life insurance policy extends throughout your entire life. If the policyholder maintains monthly premiums, the policy will last until the person passes away.
Benefits
A term life policy is good for the face value of the policy. Therefore, if a person purchases a $25,000 term life insurance policy and passes away within the given time period, his beneficiaries will receive $25,000. However, a whole life policy features an investment component that is similar to a savings account. When a person pays his premium, he also earns a small percentage of interest. This means the policy grows in value over time.
Misconceptions
While many believe the added value of a whole life insurance policy makes it a better investment, these policies often do not serve as a better investment than other long-term investment vehicles such as stocks and bonds. For this reason, whole life insurance policies are often better indicated when they are purchased at a younger age when the policy will have time to develop real value.
Costs
A whole life insurance policy can be anywhere from five to 10 times the cost of a term life policy, according to CNN.com. Because term life policies do not feature a savings component and are not guaranteed to pay out, they are significantly less expensive.
Considerations
Whether term or whole life, the right type of policy depends upon the needs of a person and her beneficiaries. For a person with few beneficiaries who may not need to cover many expenses beyond funeral costs, term life may be the best and most cost-effective solution. If a person with a young family is beginning to save, a whole life insurance policy may be the best solution as it is guaranteed to provide for a child or children because the policy covers the policyholder's entire life.
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