Insurance: Whole life and term life explained

Many folks just think that buying a policy is ALL they need, and they are set for life--WRONG!

Life insurance ain’t all that easy to understand. Many folks just think that buying a policy is ALL they need, and they are set for life--WRONG! Did you know, if you outlive a term life policy, it will expire? If you pass away after the policy expires, there will be zero death benefits for loved ones.

If you’re over 50, you’ve probably had your life insurance policy for a few years now, but did you understand what you were purchasing when you pulled the trigger?

What is term life insurance?

Term life insurance, also known as pure life insurance, guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to just end.

Important things to understand about term life…

  • Provides only death benefits
  • Pays benefits only if you pass away while the term of the policy is in effect
  • Easy and affordable to buy
  • Purchased for a specific time period, such as 5, 10, 15, or 30 years, known as a “term”
  • Becomes more costly, especially after age 50
  • The term must be renewed if you want coverage to be extended past the term length
  • Can be used as temporary additional coverage with a permanent life insurance policy
  • Can be converted to whole life insurance

What is whole life insurance?

Whole life insurance provides permanent death benefit coverage for the life of the insured. It is also costlier than term life, at least 10x more expensive. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate on a tax-advantaged basis. These policies may be known as traditional life insurance. Whole life insurance policies are one type of permanent life insurance. Whole life insurance is the original life insurance policy.

Important things to understand about whole life…

  • Covers you for life
  • Provides death benefits as well as a cash value accumulation that builds during the life of the policy
  • You typically must qualify with a health examination
  • Can be purchased without a medical exam but at a higher cost
  • Takes 12 to 15 years to build up a decent cash value
  • Can be a good choice for estate planning
  • Cash value is based on how much the return on investment is worth
  • A portion of the cash value can be withdrawn or borrowed during the life of the policy
  • Initially has more expensive premiums than term life insurance but can potentially save you money over the life of the policy if in force for a considerable number of years

Is whole life better than term life insurance?

Whole life provides many benefits compared to a term life policy: it is permanent, it has a cash value investment component, and it offers more ways to protect your family’s finances over the long term. Those features make it a better choice for many people – but if you’re only looking for the biggest death benefit, you can get per dollar paid in premiums, then term life insurance may be a better choice.

Are whole life insurance policies worth it?

As with any other financial services product, that depends on your entire situation and future plans. If you want life insurance protection that lasts all of your born days, then a whole life policy from a solid provider is a good choice for your needs. It can also be a worthwhile investment for more seasoned folks who are concerned about estate planning and minimizing the effects of taxes on their heirs.

What happens to term life insurance at the end of the term?

Generally speaking, when a term life policy comes to the end of its term (or effective period), you either have to buy another policy (at a higher cost) or go without life insurance. One exception: If you have a term policy with a guaranteed renewal clause that will allow you to renew at the end of your term on a year-by-year basis, typically at a far higher rate. While expensive, it can be worthwhile if your health has declined or you are otherwise uninsurable.

Are whole and term life insurance policies taxable?

In general, the payout from a life insurance policy after the insured’s death is not taxed, but always consult your tax or accounting advisor to get all the details on tax advantages.