Life Insurance quite generally is a policy whereby you pay a company a
premium so that if you die while covered your descendents receive
financial benefits. Within the larger Life Insurance window there exist
two broad categories of policies, Term and Whole life (Whole Life is
also known by the equivalent term Universal Life Insurance). Term Life
is exactly what its name implies, valid only for a certain period of
time, whereas Whole life lasts the duration of one's life.
Price Differences
Because Term Life has a structured beginning and end, typically from 1
to 30 years, it is normally quite a bit cheaper than Whole Life. That
is because under Whole Life it is assured that the insurer will
eventually pay out (as we all eventually die). Under Term Life,
however, there is a very good chance that you will live through the
period of the policy and thus the insurance company can simply take
your premiums without ever having to pay out anything.
Benefits Differences
Another important distinction between Term and Whole Life is the fact
that at the end of the Term Policy, the policyholder is left with
nothing but his own health. On the other hand, with a Whole Life Policy
the insurer often takes a portion of the premium and places it into a
savings account for the policyholder. In case of emergency later in
life, the Whole Life Policy Holder can access that money to meet some
needs while still living. As you can imagine, the Insurance Company
raises the price they charge for access to all of this.
Deciding Between the Two
So, how does one decide between Term and Whole Life Insurance? To best
answer that question it is important to ask why you need the insurance
in the first place. Is it because you have young children and a spouse
who does not have the earning potential to get your children through
college? Or is it because you work in a dangerous industry and will
regularly face the prospect of death over the next few years? These are
both excellent candidates for Term Life Insurance. In the first case,
it is important that the provider ensure enough financial support for
approximately 10 years and then the need drops off, while the second
example may require a shorter 3 - 5 year Term Life Policy.
On the other hand, let's imagine that you have a mentally handicapped
person you will support indefinitely, or a spouse that has never worked
at all. These may be better candidates for Whole Life as the financial
need they feel responsible for extends not only to some definite period
in the future, but as long as the other person is alive. Under these
circumstances, paying the premium for Whole Life might be worthwhile.
Term and Whole Life Insurance fill an important void in many lives by
providing some assurance that in case of an accident, loved ones will
not be left stranded. It is important to remember, however, that the
policies are not panaceas. The savings rate on Whole Life Policies is
usually dismal compared to open market rates, and with Term, you are
making payments on a product you may never use. Ultimately, the
decision to purchase either of these products should involve weighing
your personal risk and health, your current and expected financial
situation, and alternative uses for funds you have earmarked for a
policy.
