Most people buy life insurance so that if they die, their families’ financial needs will still be met. The two most common types of life insurance are term life and whole life. Both types require policyholders to make annual payments (pay premiums) so that upon the insured’s death, the insurance company will pay the beneficiary the value of the policy.
The cost of life insurance is based on how much will be paid upon the policyholder’s death, as well as the policyholder’s age, general health, medical history and tobacco use. The younger and healthier a person is, the less expensive the insurance will be.
Key Features of Term Life Insurance
Term life insurance is purchased for a set number of years—a time period that is agreed upon in advance. Some term life policies may be as short as one year (annual renewable term life), but most are available for 5, 10, 20, or 30 years. As long as the premiums are paid during the term, the coverage remains in effect for the agreed upon number of years.
The insurance policy only pays out if the insured dies while the policy is in effect. If the policy expires before the insured dies, the insured may have the option of renewing the policy, but the terms and the annual premium will be different. The premium will most likely be higher, because the policyholder will be older and a primary determinant of the premium is age.
Term life insurance premiums are less expensive than whole life insurance premiums. Sometimes these are called “level term” policies because the premium stays the same as long as the policy is in effect.
Key Features of Whole Life Insurance
Whole life insurance remains in effect for the policy holder’s entire life, as long as the insurance premiums are paid. Whole life policies are more expensive because they accumulate cash value. With most whole life policies, a portion of the premiums is invested by the insurer and it earns interest. The cash value can be used to pay the annual premiums. Sometimes dividends are paid on the whole life insurance policy. These can be paid to the policyholder, re-invested to continue building the cash value or applied toward future premiums.
Different types of whole life insurance policies are available, each with its own stipulations. Universal and variable whole life are common types; hybrids of these are also available. The different types may allow the policyholder to vary the premium, vary how the policy’s cash value is invested and sometimes even change the amount of the death benefits. With permanent whole life policies, the premiums always remain the same and the premium is based on the insured’s age at the time of purchase.
Similarities Among Term and Whole Life
As the insurance industry has changed, more options have become available for policyholders. Some things that used to only be available with whole life insurance policies, such as accelerated death benefits or “living benefits” are now available with many term life policies. The accelerated death benefit allows an insured who meets certain requirements (such as having a terminal illness with death expected in a certain time period) to receive a portion of the life insurance benefit while he or she is still living.
A variety of insurance riders can be purchased for both term and whole life insurance that personalize the policies to the needs of policyholders and their families.
Of course, the most obvious common feature is the calculation of the premium—all life insurance policy premiums are calculated based on the age, health, and lifestyle of the insured at the time he or she applies for the insurance.
Choosing the Right Insurance Policy
Purchasing an insurance policy is an important investment in your family’s financial future. Consulting with one or more of the following professionals, who offer different perspectives on your situation, may be helpful in understanding your options:
- life insurance lawyer
- financial advisor
- life insurance broker.
Life insurance lawyer Chad G. Boonswang helps clients secure their families’ futures by choosing the right insurance for their needs. Contact him today.