A life insurance policy is an important investment that requires careful thought and planning to select a policy that will provide appropriately for a policyholder's beneficiaries. Two chief types exist: term or cash life insurance. Each offers different factors in terms of costs, benefits, time frame and considerations.
Function
While both term and cash value (also known as whole or permanent) life insurance aim to provide for a person's beneficiaries in the event of a policyholder's death, these policies work in different ways. For example, a cash value life insurance policy lasts for the duration of a person's life, meaning it is guaranteed to pay out upon the policyholder's death. However, a term life insurance policy is purchased for a designated period of time--ranging from one year to as many as 30 years. While a term life policy often is renewable, the expenses tend to rise as the person gets older.
Benefits
A cash value life insurance policy lives up to its name--not only is the policy good for the agreed-upon amount the policyholder pays a premium on, it also features a separate savings component. This means a portion of the policyholder's premiums earn interest, giving the policy a cash value. By comparison, a term policy does not hold cash value. If a person does not pass away during the period of time by which the policy is good, the policy is forfeited and no benefits are received.
Expert Insight
While a person may initially view a cash value life insurance policy as a better investment than term life because it earns interest, financial experts such as FOX Business analyst Dave Ramsey caution that life insurance is not an investment vehicle that provides sufficient returns. Because many life insurance policies do not live up to their savings projections, the policy may not offer as great a return as other investment options, such as mutual funds. Because term life insurance can cost five to 10 times less than whole life insurance, Ramsey suggests purchasing term life and investing the money you would have spent on whole life in a higher-return investment.
Considerations
Another consideration a person purchasing a life insurance policy must consider is his long-term needs for a policy. For example, a younger couple who may wish to leave a guaranteed life insurance policy for their beneficiaries may do well to invest in a cash value life insurance policy because the policy has sufficient time to increase in value and offers a guaranteed payout.
However, some potential policyholders do not see their life insurance needs extending beyond a certain amount of time, such as when children are grown. In this instance, term life insurance may be best.
Expense
While term life insurance is considered to be the cheaper alternative to whole life insurance, term life insurance increases in cost as a person ages. For example, if a person wishes to obtain a term life insurance policy at age 65, this policy may be highly expensive. The same is true for those who have pre-existing medical conditions or habits that could increase the chance for death, such as smoking, diabetes, high blood pressure or cancer. In terms of these exceptions, term life and whole life insurance may be closer in expense than previously thought.
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