The Difference between Term and Other Life Insurance Policies

The two basic life insurance policies are whole life and term. Everything else is a variation of these two types.

Term Insurance- The mother of all life insurance offers protection for your family for a certain, specified period of time—usually one, five, 10, 20, 30 years or up to the age of 65.

A term policy only pays a benefit if you die during the period covered by the policy. If you decide to stop paying premiums, the insurance coverage stops along with it.

If you have a renewable term policy, you can renew the policy after the term although the premium will be higher. The advantage of this is that you won’t have to provide evidence of insurability to renew the policy.

Initially, term insurance is less expensive in the beginning. Young parents, new homeowners or people with high financial obligations might find term policy most useful.

Whole Life Insurance- You may hear this referred to as straight or permanent life. It can be in force long as you live. You pay a constant but much higher premium than term life because of one feature—cash value.

Cash Value increases over time as sort of a cash deferred investment. So, if you cancel your policy, you can get the cash value at the time in a lump sum. You pay taxes only if that amount exceeds the amount of premiums you’ve paid in.

You can use the cash value the following ways:

• You can borrow against the cash value. If you pass away and the loan is not repaid, it will be paid back from the proceeds of the death benefit.

• If you want to stop paying premiums, the cash value can fund a term policy for a period of time

• You can surrender the policy and receive the cash value in return

Other Forms of Whole Life Insurance

Modified Life- The premium remains low in the beginning years and increases in the later years.

Limited Payment Life- This policy remains in force your whole life but the premiums get paid over a shorter period than other whole life policies. For example, you might pay the premiums for 20 years. The policy is then paid up. The premiums are higher because of this.

Single Premium Whole Life- You pay the premium in one lump sum at the beginning of the period and the policy stays in force for your whole life.

Combination Whole Life Plans- Aspects of term and whole life products are combined in these policies.

Universal Life Insurance- There are many variables in universal life insurance. The accumulated amount is impacted by current interest rates. This impacts the amount of and when the premium is paid. Interest rates are usually changed each year.

Current Assumption Whole Life Insurance- This policy has fixed premiums and fixed death benefits. The cash value growth depends on financial market conditions.

Variable Life Insurance- This policy provides death benefits and cash values that vary according to the investment performance of funds managed by the life insurance company.

Second to Die Life Insurance- Also known as dual life or survivorship insurance, this is primarily an estate planning tool that pays a death benefits only upon the death of the insured who lives the longest. Its purpose is to pay estate taxes upon the death of the second insured.

Because it’s based on joint life expectancy, the premiums run less than individual policies.

Conclusions

There is an incredible array of life insurance products available for any needs you may have. Term life certainly appears to be the simplest life insurance policy buy may have limited use after you get into your fifties.

The whole life insurance family may be good for some cash benefits but comes with a significantly higher premium than term.

So, carefully consider which type of life insurance policy is best for you—for the short term and the long term.