what is the difference between whole life and term life insurance policies?

Answer 1

Whole life builds cash value, which you can borrow at anytime. If you die while the policy is still enforced, you will lose the cash value. If you missed any premiums, your cash value will be automatically used to pay it. Loan interest on the cash value will accumulate and you will have to pay this back. If the cash value is depleted, you will lose coverage. Because of the cash value feature, it is said that whole life policies are expensive.

With term insurance, it does not build cash value. Therefore, term insurance are inexpensive. Since it is inexpensive, you can save your money in savings accounts, CDs, money markets, mutual funds, 401k, or your own IRA. Most term policies are renewable, which means no proof of insurability is required.

Answer 2

There are three basic and current life insurance policies: term insurance, whole insurance, and endowment insurance. The following is an outline in which the important features are noted.


TERM INSURANCE

Coverage protection: for a "term" of one or more years, usually 30 years being the maximum
Death benefits: paid only if the policy owner were to die within that term of years
Renewable: some are renewable for more additional terms even if the olicy owners' health has changed
Convertible: before the end of the conversion period, the policy owner may trade the term policy for a whole life or endowment policy even if he/she is not in good health

WHOLE LIFE INSURANCE

Coverage protection: death protection for as long as the policy owner lives
Cash values: a benefit the owner does not lose when he/she stops paying the premiums
Loan: the cash value may also be used as collateral for a loan

ENDOWMENT INSURANCE

Income benefit: pays a sum or income to the policyholder if he/she lives to a certain age
Death benefit: if the policy holder were to die before that certain age, the death benefit would be paid to the designated beneficary or beneficiaries

In summary, do not buy life insurance unless you plan to remain faithful to it. A policy can be a smart buy when hels for 20 to 30 years, but it can be very expensive if you decide to quit during the early years of the policy.

When you finally receive your new policy, be sure to thoroughly read through it and inquire with the agent on anything that you do not understand. It is also important to review your life insurance policy every few years or so to keep up with income changes and life responsibilities.

Answer 3

In-short, Term life is coverage for a propose payment if something happen during a prescribe time. Whole life is the same thing with an addition payment that is used to pay for the later years higher (term cost) and cash benefit.

There is an argument that coverage for 10 years is mandatory, after that if the difference between the term policy and the whole life policy for the same amount of insurance coverage, if it was placed in a mutual fund (IRA), your financial goals would be met well.

EXAMPLE:
$50,000 10 year term policy $13.34 per month
$50,000 Whole Life policy $41.25 per month
THE DIFFERENCE IS $27.91 per month
This difference if put in a mutual fund for 10 years will keep you well covered insurance wise.

Answer 4

A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against.

Answer 5

A) The difference between term and whole life is the length of time the policy will last. B) $50,000 invested at 4% would return ~$166/month. Is that enough money to raise your kids on?

Answer 6

Thanks Hadley, for the extremely rare and accurate description of permanent coverage and its value. I'm sick of the term/perm argument waged by persons who haven't a clue.

Proper needs assessment is one key, dividends are the other. In most cases, one is incorrect to have all permanent or all term coverage. There is normally a reason, or several, to have some permanent coverage; and always a higher need for term while raising a family. NEVER purchase life insurance without the assistance of a properly qualified financial advisor or planner.

Also, to those who say "buy term, invest the rest." Baloney; it doesn't happen. Besides, every portfolio should have a bond portion, correct? When you can earn typically 6-8% on your cash value with no risk to principle, whole life can be a good fill for that need. Variable Universal Life offers permanent coverage with the ability to shelter that cash value in market investments and withdraw cash value tax free in retirement. And contrary to another poster here, you do NOT have to pay policy loans back. They are deducted from the death benefit. Interest paid on policy loans is offset by continued interest on your cash values. While life insurance is not suggested as necessarily an appropriate savings tool, you can think of this scenario as tax-free withdrawals on tax-deferred savings.

Answer 7

Term life insurance is designed to help people buy life insurance protection they need when they can't afford to purchase all permanent insurance, or when they only need life insurance protection for a specific period of time. Term insurance provides you with a guaranteed death benefit, but no cash value.

The life insurance premiums will increase at pre-determined intervals such as 1 year, 5 years, 10 years or 20 years. This depends on the type of term life policy you select. A term life policy is often the choice when your life insurance protection needs are higher for a period of time, then drop down to lower levels in later years, such as when your family is growing.

Term insurance can also be an effective way to provide supplemental coverage in addition to permanent insurance during years you need higher levels of protection, such as when your family and other financial responsibilities are beyond your current income.

In these situations, term coverage allows you to purchase important death benefit protection without going beyond your budget. Also, if the coverage is convertible (the coverage can be "converted" to a comparable permanent life insurance policy, without the need to provide evidence of insurability), you can get the coverage you need today — with the ability to purchase permanent insurance coverage in the future.

The Real Cost of Term Life Insurance

However, term insurance has its disadvantages. It isn’t right under all circumstances. Among its drawbacks, be sure to note the following:

You do have to "die to be paid." As unpleasant as that sounds, it's true. Term life insurance provides a death benefit only, for a specific period of time. So, if you outlive your policy period, there is no payout to your beneficiaries. When the term coverage expires, your protection ends, too. And, if you stop paying your life insurance premiums, the coverage ends. Period.

Here’s an example for you - Let's say you own a $250,000 term life insurance policy. You've kept the coverage in force for twenty years, and the policy expires at midnight on June 30. If you die at 11:59 p.m. on June 30, your beneficiary receives the full $250,000 in death benefit proceeds. However, if you die at 12:01 a.m. on July 1, your beneficiary receives nothing under the term insurance policy, since the policy has expired.

Purchasing term insurance is often compared to renting an apartment. When you rent, you get the full and immediate use of the apartment and all that goes with it, but only for as long as you continue paying your rent. As soon as your lease expires, you must leave your apartment. Even if you rented the apartment for 10 years, you have no "equity" or cash value that belongs to you.

There is the Very Real Risk of becoming uninsurable when the term insurance coverage expires. While many term policies are convertible to permanent insurance coverage, others may not be. And, even if the term policy is convertible, there are time limits. If the policy is allowed to expire, you may be required to re-apply for life insurance coverage, and prove insurability by taking a medical exam. If you are found to be uninsurable at that time, you will be without life insurance coverage.

Since premiums increase at each renewal, the long-term cost of term can be very costly. Many people buy term insurance coverage when they are in their 20s or 30s because it appears more affordable when compared to a cash value or permanent life insurance policy with the same death benefit amount. By the time they're in their 40s or 50s, the coverage seems a little more expensive, as the rate goes up. In their 50s, the cost may be comparable to the cost of permanent coverage. Finally, in their 60s, if not sooner, they may decide to drop the policy — not because they no longer need the protection, but because they usually can't afford it. However, the person who paid more for a permanent life insurance policy in their 20s may still be paying the same premium. That's why the term policy's conversion privilege is so important. This valuable feature is usually available in the first few years of the policy, and allows you to convert to permanent insurance without submitting evidence of insurability. Converting to a permanent policy lets you "lock in" a fixed premium, and your life insurance coverage can never be canceled, provided you pay your life insurance premiums.

The Value of Permanent Life Insurance

Cash value or Permanent life insurance is often the best long term solution for many people. The reasons:

Permanent life insurance provides you with lifetime insurance protection, provided you pay your premiums. Usually, once you’ve been approved for coverage, your policy cannot be canceled by the insurer. Regardless of your health, the insurance will remain in force.

Despite higher initial premiums, permanent life insurance can be less expensive than term life insurance in the long run. Many permanent life insurance policies are eligible for dividends, which are not guaranteed, if and when they are declared by the insurance company. Many companies offer the option to apply current and accumulated dividend values towards payment of all or part of your life insurance premiums. If dividend values are sufficient, out-of-pocket premium payments may be reduced after several years, yet coverage continues for your entire life. So, while life insurance premiums must be paid under both, the permanent and term life insurance plans, long-term out-of-pocket cost of permanent insurance may be lower compared to the total cost for a term life insurance policy.

Permanent insurance can eliminate the potential problem of future insurability. Cash value life insurance policies do not expire after a certain period of time. And, some policies contain guaranteed purchase options, which allow you to buy additional life insurance coverage at specified times, regardless of your health.

Cash Value Life Insurance builds cash value within the policy. This amount, part of which is guaranteed under many policies, can be used in the future for any purpose you wish. If you choose, you can borrow cash value for a down payment on a home, to help pay for your children's college education, or to provide income for your retirement. (Note: Borrowing cash value from your permanent life insurance policy requires the payment of loan interest and will affect your total policy values.) Also, if you decide to stop paying premiums and surrender or cancel your permanent insurance policy, the guaranteed policy values are yours.

Recommendation

When purchasing life insurance coverage — renewing or converting a term policy — look at more than just the premium. Consider the financial rating of the insurance company. Consider your long term goals and needs for protection. A professional insurance agent can discuss your life insurance goals, analyze your insurance needs and review the pros and cons of the various life insurance policy options available.

I hope that helps! Best of luck to you.

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