When it comes to shopping for life insurance people are generally faced with one primary question that rises above the rest: whole life or term life? Factors such as premium cost and benefit amount are also a major consideration, but these factors are in fact largely influenced by the original whole vs term dilemma. There are also other types of life insurance, but they are for the most part subcategories or variations of these main two types.
What Are Whole Life Policies and Term Life Policies?
Whole Life – Whole life insurance is a type of permanent life insurance in which people pay a set premium to receive a guaranteed death benefit. The policy never expires as long as the person continues to pay the premiums, and the premiums never increase. The policy also accumulates a cash value which can be withdrawn from the policy.
Term Life – Term life insurance offers a guaranteed death benefit, but only for a predefined period of time. After the term of the policy expires the death benefit is also gone and in order to continue coverage a new policy would have to be purchased, almost always at a higher premium since the insured is now older. Term life policies do not accumulate a cash value.
What Are the Advantages of Whole Life and Term Life?
Whole life and term life each come with their own set of advantages which make them more or less appropriate for certain types of people in various circumstances.
Advantages of Whole Life
- The death benefit never goes away as long as the policy remains current.
- The premiums never increase.
- The policy accumulates a cash value.
- The policy can act as a type of forced savings tool.
- The policy offers excellent peace of mind since benefits and costs remain stable.
Advantages of Term Life
- Lower premiums relative to the death benefit.
- Often no medical exam required.
- Good choice for temporary coverage needs.
- Available in assorted term lengths (Ex: 5, 10, 15, 20, or even 30 year terms).
Other Types of Life Insurance
Whole life and term life are the two most commonly discussed types of life insurance, however, there are other types which are similar in many ways, but which do have some differences.
Decreasing Term Life – The type of term life most frequently discussed is level term life, in which the premiums remain the same for the duration of the term as does the death benefit. Another option is decreasing term life. With decreasing term life, the death benefit decreases the further into the term the insured goes. In turn, the death benefit is higher if the person dies in the first year than if he or she dies in the final year. On the plus side, the premiums themselves are often lower than for a level term policy.
Universal Life – Universal life is a type of permanent life insurance that is similar in some ways to whole life. As with whole life, cash value accumulates in the policy. Universal life offers added flexibility with regard to what is done with the cash value. It can be used to increase the death benefit or lower or suspend premium payments.
Variable Life – Like traditional whole life and universal life, variable life is also a type of permanent life insurance. Whole and universal life build their cash values by investing part of the premium and earning a return over time. With variable life, the insured has greater control of the type of investing that is taking place and can choose from investments such as stocks, bonds, and mutual funds.
Hybrids – Often the life insurance policies discussed here are sold in hybrid forms with each other. For example, the consumer may purchase a term life policy that is guaranteed convertible into permanent coverage at the end of the term. Policies such as variable-universal combine the added flexibility of the investment aspect that variable life brings with the added flexibility of what can be done with the cash value that universal life brings.
What to Consider When Choosing a Life Insurance Policy
The various options and flexibility that these different types of life insurance policies offer can be great for helping consumers pick the best policy type for their needs. Having too many choices can also be very daunting. It is important for people to consider their own unique set of circumstances and objectives.
A primary factor of course is why the person is buying life insurance to begin with. Is it to cover the cost of a mortgage of other major expense in the event that the person dies before it is paid for? Is it to provide a financial security blanket to a surviving spouse? Is it to help cover the cost of estate taxes and burial and funeral costs?
It is important to factor in budgetary concern. How much can be spent on premiums? Would any left over amount be better to put toward individual investments, or does the person have trouble saving money on their own? Could premiums still be afforded if other expenses rose or income decreased, and how likely are these types of occurrences in the given individual’s situation?
The good news is that consumers do not have to face these questions alone. The agents at Beaty Insurance are always happy to sit down with clients and discuss insurance needs based on individual circumstances. We can also provide additional information about insurance types, answer questions, and clarify any confusion.