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whats the difference b/w term insurance and whole life insurance?

June 3rd, 2010 | | Tags: , , | 4 Comments | |

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4 Responses to “whats the difference b/w term insurance and whole life insurance?”

  1. Finance1o1.blogspot.com ® Says:
     June 3rd, 2010 at 9:01 am

    What is cash value life insurance? It is a term policy to age 100 that contains a savings vehicle in it. Cash value comes in many forms, such as whole life, universal life, variable life, or a mixture of those words together such as variable universal life or universal whole life, etc. The advantages of having cash value life insurance is that you are protected until age 100, you can use the cash value anytime for any use such as paying your premiums, and interest on your cash value is tax-deferred.

    The disadvantages of having cash value life insurance is that you are paying lots of premiums for low amount of coverage, no cash value is accumulated during first two years of the policy, rate of return is very low, and if you use any of the cash value, you will owe monthly interest on it. This interest does not go back into the cash value, but rather kept by the insurance company because the money you taken out of the cash value is treated as a loan. In many policies, if you were to die, your beneficiary will receive the face amount and all cash value will be kept by the insurance company. Keep in mind, if you use any of the cash value and you did not pay it back, this amount will be deducted from face amount upon your death.

    Another disadvantage of cash value life insurance is that they are riddle with insurance fees. The most noticeable fee is the surrender charge. This is clearly stated in the policy of how much cash value you will get if you surrender the policy. Then there are fees you don’t see such as administrative fees, policy fees, maintenance fees, and all these other operating fees. If your cash value life insurance is a variable policy, that means your cash value is invested in the stock market. Investments too have their own operating fees. If you combine investments and life insurance together, now you have so many different fees that eats away the returns on your investments.

    You are probably asking, why would anyone buy this kind of life insurance? First reason is that many people do not understand how this policy works. Second reason is that people don’t buy life insurance, they are sold on it. The agent who sells cash value life insurance does not care about you or your family. All he/she cares about is how much commissions he/she is getting paid and they going to use whatever deceptive sales tactic to make you buy it.

    So, what is term insurance? It is the type of insurance that provides a level death benefit for life. Just like car insurance, if you don’t pay your premiums, you will lose coverage. Advantages of having term insurance are: premiums are very low during the term, you have more flexibility to invest your money in a savings vehicle (hence the phrase, "buy term and invest the difference"), and if you were to die during the term, your beneficiary will get the face amount and all your investments. Another advantage is that you can change the amount of coverage without affecting your savings and vice versa. (In cash value life policies, you are stuck with paying into both.)

    The disadvantage of term that while premium remain fix for certain amount of period (10, 15, 20, 25, 30, or 35 years), the premium will go up when it is time to renew. Majority of term policies provide renewable term coverage up to age 100. But there are some term policies that stop coverage after the level term expires because the insurance company wants you to convert it to whole life or universal life.

    Why would people buy term insurance? First, premiums are very low and remain fix during the term. In the early stages of your adult life, you probably have lots of debt to pay off such as your mortgage, you probably have kids to support, and you probably don’t have much money saved for retirement. So you need lots of insurance coverage to protect the family. As you get older, your kids are all grown up, your mortgage is or almost paid off, and you better have lots of money saved for retirement. As you get older, you probably won’t need life insurance or need as much coverage as you did 20 to 30 years ago.

    What happens when the level term expires? When the level term expires, you enter the phase of the contract called "Annual Renewable Term." That means you have the right to renew the term without having to provide proof of insurability. The premiums will go up every year or so (check the policy on how often the premiums goes up after the level term). Depending on your policy, you are usually given several options when the level term expires.
    (1) You may convert it to a permanent whole life policy (which I don’t recommend).
    (2) You may exchange it to another level term
    (3) You may refuse to pay the premiums to cancel the policy
    (4) You can change the death benefit
    (5) You may renew the term for another 5 years until age 75, which then you may renew every year until the policy expires.

  2. simpfin Says:
     June 3rd, 2010 at 9:01 am

    Term insurance means to cover death risk of the insured person happening during a particular agreed period, between the insurer and the insured person. Whole life insurance on the other-hand means to cover the death risk during the entire life of the insured person.

  3. Insurance Pickle.com Says:
     June 3rd, 2010 at 9:01 am

    How long it lasts. Term insurance generally just lasts the term you purchase. Whole life lasts your whole life. Neither is ‘better.’ It just depends on how long you want coverage. However, if you just want death benefit and have no interest in cash values then you could get a universal life policy with guaranteed premiums that would last until you’re 100 years old…actually up to about 120 years old.

  4. Denise Says:
     June 3rd, 2010 at 9:01 am

    Whole life insurance is lifelong cover, and is usually linked to a cash value component, because of which the premiums can be quite high. On the other hand term life insurance covers you only for a fixed period, and has no cash value component attached to it, which makes premiums more affordable. Life insurance 101 is a great resource to learn more about the different types of life insurance policies.

    Denise at AccuQuote
    Disclaimer: I work for AccuQuote and this is my personal opinion.

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