What’s The Difference between Whole and Term Life Insurance?

It’s important to know the difference between the whole versus the term life insurance before you start to shop for it.

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Whole life (also called permanent) policies are insurance policies that accrue cash value over time and usually pay the dividends.  Buying a whole life policy is an investment.  You can draw against the cash value as the named insured.  In comparison with term policies, whole policies are considered to be more flexible and more expensive. If the required premiums are paid, whole life insurance is guaranteed to remain in force for the insured’s entire lifetime or to the maturity date. Whole life premiums usually do not increase with age and are fixed, based on the age of issue.

Term life policies are less expensive and inflexible. Term policies are bought for a specific period of time. Term life insurance provides coverage at a fixed rate of payments for a limited period of time, the relevant term.  Before the policy expires, the benefits are paid if the named insured dies. However, there are no return premiums, if the policy expires before the death of the insured.  You have the option of renewing the policy for another specified period of time, or letting it expire, since you are the insured.

The analogy of the difference between whole life and term policies can be considered as the difference in buying verses renting a house.  A whole policy is very much analogous to buying a new house. The purchase of a house is an investment. Usually the house appreciates in value. While equity grows in the house, you can borrow against it. When you decide to move out, you sell the house and reap the financial rewards of the investment.

Renting, on the other hand, is analogous concept of a term policy. You rent an apartment or house for a specific period of time or for a lease.  You do not have the option to borrow against the equity. When the lease is up, you can either renew the lease, or you move out.  If you choose to move, you do not get a portion of the rent you paid, back.

Term policies do, however, allow you to upgrade to a permanent policy without the need for a physical exam (similar to renting a house with the option to buy).  A change in your financial condition may allow you to afford a whole policy that was out of your financial reach a few years earlier.

Some whole life insurance features:

  • Covers your life
  • Provides death benefits as well as a cash value accumulation that builds during the life of the policy
  • You typically must qualify with a health examination
  • It can be purchased at a higher cost without a medical exam
  • To build up a decent cash value, it will take about 12 to 15 years

Some term life insurance features:

  • Provide death benefits only
  • During the effect of policy term, benefits are paid only when the insured dies
  • Easiest and most affordable life insurance to buy

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