The term vs. whole life insurance debate is a popular one, especially amongst higher income individuals, such as our physician and dentist clients. Today we will explain the difference between term and whole life insurance policies, how term life insurance works, how whole life insurance works, discuss other cash value life insurance alternatives to whole life, and identify scenarios where each type could be appropriate.
What is the Difference Between Term and Whole Life Insurance?
There are two main categories of life insurance: temporary and permanent.
Temporary life insurance is called term life insurance. It lasts for a defined term (number of years or age). If you pass away during that time span, your beneficiaries will receive the death benefit amount you signed up for.
With term insurance, the risk to the insurance company is if you pass away. Odds are, you will outlive the term period. Therefore, it is rather inexpensive to purchase a policy, assuming you get approved for a policy at a favorable health rate.
All life insurance policies require medical underwriting. Life insurance companies prefer to insure somewhat healthy people, who aren’t going to die anytime soon. Life insurance companies want to make sure they’re not setting themselves up to pay out a large death claim on a new policyholder. Sure, there could be an accident, or a person could be diagnosed with a terminal illness shortly after purchasing a policy. Most people, though, who are in decent health today, will continue to remain in decent health for the foreseeable future. Use your age and health to your advantage and lock in a policy when you are young and healthy. It’s easier to get when you are younger and healthier, and less expensive. Rarely do people get younger and healthier over time.
Permanent life insurance is a policy that can last your entire life (hence the name). Due to this, the risk to the insurance company is when you will pass away. How many years of premiums can they collect from you before that day comes?
Whole life insurance is one of several types of permanent life insurance (universal life insurance, variable life insurance, adjustable life insurance, indexed life insurance, combinations of these, etc.).
In addition to providing a death benefit to your beneficiaries when you pass away, some permanent life insurance policies can also accumulate a cash value within the policy that you can potentially withdraw or borrow against.
The main difference between term and whole life insurance is the duration – term life insurance is temporary, while whole life insurance is permanent (until you die or let the policy lapse).
In Summary
What is the difference between term and whole life insurance? Term is temporary, whole life can last indefinitely. If you keep paying the premiums on a whole life insurance policy, the coverage will stay in force and your beneficiaries will receive a check when you die.
How does term life insurance work? You sign up for a policy that lasts a finite number of years (maybe 20 or 30 years). There is a defined age or number of years when the policy expires. As long as you pay your premiums, if you die before the policy expiration date, your beneficiaries will receive the money when you pass away.
How does whole life insurance work? Whole life is designed to last your entire life and can have guaranteed death benefits and even cash accumulation built into the life insurance policy contract. While it is considerably more expensive than term life insurance, it can be appropriate if you are looking for coverage to last your whole life.
Term vs. whole life insurance: which one is right for you? Maybe it’s a combination of the two. Contact Romero Insurance and Financial Services for more information about our financial plans and insurance coverage.
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