Term versus Whole Life Insurance
When an individual decides that he wants to purchase a life insurance contract, the hardest thing is to select whether to choose term life insurance or whole life insurance. Even life insurance professionals that have spent a number of years working with both types of insurance contracts do not agree which option is better. Both term life insurance and whole life insurance have their advantages and as a result it is extremely important to know when one alternative is better than the other.
The duration of the contract
The basic difference between term life insurance and whole life insurance is the time period for which the contract is underwritten. Whole life insurance lasts for the whole remaining life of the individual whereas term life insurance terminates after a fixed number of years. Life insurance providers offer various term life insurance contracts: from the ones that are valid only for one year to those that can last up to 40 years. Despite this flexibility, sooner or later the insurance contract is terminated and the person is forced to buy a new life insurance policy. At that time a person may not be able to get a good term of the contract and affordable price of the premiums. The reason behind this is that the health of the individual may be worse and he will be older.
For example, Luke is 25 and purchased term life insurance contract for 30 years. After 30 years Luke has to search for new life insurance contract. However, this time he is 55 years old, is overweight and has a high blood pressure. As a result, most likely he will be asked to pay the premiums that will be couple or even more times higher than he used to pay for his old contract. With whole life insurance this problem does not exist because the contract is never terminated. As a result, the person does not have to fear that at some point in the future he will not be able to afford the premiums or that life insurance companies will reject his application. On the other hand, term life insurance offers more flexibility because a person is forced to have the same contract for a very long period.
The second difference between term life insurance contract and whole life insurance contract is that term life insurance offers only the insurance component. On the contrary, whole life insurance offers two components: protection and investment. For example, Lucy and Stacy are twin sisters. Lucy decided to buy term life insurance for 30 years and Stacy purchased whole life insurance. The initial death benefit is the same for both life insurance policies. However, after Lucy’s death her dependents will get only the face value of her life insurance policy. On the contrary, Stacy’s dependents will get a minimum guaranteed death benefit and the proceeds from the investment. This does not necessarily mean that Stacy’s dependents will get a bigger amount of cover. This will be true only if the gains from investment will be sufficiently high. If money is not invested successfully, Stacy’s dependents will get only a minimum amount of cover that will be lower than the death benefit of Lucy.
Price of the premiums
The third factor that differs term life insurance from whole life insurance is the price of the premiums. Depending form personal characteristics of the individual captured during the process of underwriting whole life insurance can cost three or even four times more than term life insurance. For both types of insurance contracts the premiums are set only once and are not subject to change. As a result, premiums are leveraged for the whole term of the contract. Because whole life insurance usually lasts longer than whole life insurance the premiums for this type of contract will also be higher.
Investment component is another reason that causes the price of the premiums to be higher. Most critics agree that whole life insurance would be a good option if the investment component offered a good investment alternative. However, usually the premiums are invested in the instruments that give very small returns. What is more, these investments are also very heavily taxed by the government and fund managers. Once a person signs whole life insurance contract he is forced to pay money into the fund that may show a very poor performance. An advantage of the saving component is that the person is allowed to borrow against his policy.
Which one to choose?
Usually whole life insurance policy is recommended in two situations. First of all, it is a good alternative for wealthy people. They can write the policy in trust and use the proceeds from the policy for estate planning purposes. Secondly, whole of life insurance contract is recommended for people that are in their late 60s or older. Most life insurance companies will not accept people that are older than 50 or 60 to their term life insurance policies. As a result, the only option for these elderly people is to choose whole life insurance contract.
In conclusion, both life insurance policies have their advantages and disadvantages. If one of these policies was a very bad alternative, if would soon evaporate from the market. The fact that there is a growing number of term life and whole policies providers and the variations of these policies means that a person should take time and consider these both alternatives very carefully. A whole of market life insurance broker could give advice for the individual and help him to choose between these two alternatives.