When
choosing a life insurance policy two of the main types of plans
available are term life insurance and whole life insurance. There are
major differences between the two types of policies and this article
will assist you with making the choice between term life insurance vs.
whole life insurance.
Term Life Insurance
Term
life insurance is a policy with a fixed life or term during which
payments are usually made periodically (i.e. monthly or annually). At
the end of the policies life the obligations of the insurer end, in
terms of having to pay out a sum on the death of the insured individual.
Term life insurance policies tend to be the cheapest form of life insurance that can be acquired to provide a significant benefit on the death of an insured individual. The actual costs vary based on the parameters set by the insurer, with factors like age, general health, and smoking playing a major role in determining the actual price. The cost of term life insurance increases the older that one gets, as the chances of dying increase each year, making late life term insurance often prohibitively expensive.
The specific
benefit received can vary greatly and is stipulated by the terms of the
actual policy purchased, with more funds being paid out resulting in
higher premiums over the contract. Typical amounts paid out under term
life insurance can include:
- Debt reimbursement to ensure the debts of the deceased don't pass on to a spouse or dependents
- Education costs for dependents
- Funeral costs
- Mortgage costs
- Lump-sum payments
Whole Life Insurance
Whole
life insurance (or permanent life insurance) is a policy set up where a
set benefit is to be paid out on the death of the insured and does not
expire (as long as all required payments are made). The cost to the
insured individual is often monthly or annual payments established at
the onset of the policy that will not be changed over its life. The
value of the policy is often a lump sum payment that is paid out on
death or when the insured individual reaches the age of 100.
One benefit of
whole life insurance is that it can be a good 'forced' saving measure
for individuals when planning for their spouse or dependents. The cost
of these policies can be high so they do tend to be utilized more by
individuals with high income already. The biggest benefit of the plan is
that the cost, while high, does not increase over time like term life
insurance does. Once the terms are established the cost will remain the
same.
Term Life Insurance vs. Whole Life Insurance
When
it comes to purchasing term life insurance vs. whole life insurance the
decision typically comes down to cost. While whole life insurance is a
guarantee and the cost over your life will be consistent, it is
initially often too pricey for many individuals starting a family or
whom are recently married. In these cases term life insurance is likely
the best route to go to ensure that you guarantee the financial security
of your loved ones. As with any major financial arrangement it is
important that you do review all of the details so that you have a clear
understanding of the terms of your policy and don't have any unexpected
surprises.
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