Term insurance is called pure insurance because the premiums are payments that cover the risk of insuring alone. Whole life plans offer cash values and a longer coverage period. Thus, there are two fundamental differences between term insurance and whole life insurance.
Term life insurance plans offer no cash values. In fact, only refundable term plans offer any monetary return. Even so, those plans have no cash value. Only at maturity are the premiums fully refunded; although some insurers may refund premiums at their discretion. Whole life plans have cash values that begin to accumulate about two to three years after the issue date of the policy. In addition to cash values, whole life plans may also pay dividends based on the amount of coverage that you have. The existence of cash values in whole life plans gives rise to several other differences.
Whole life plans are a type of permanent life insurance. By definition, whole life plans provide coverage for the insured up until death. Most whole life plans actually have an age limit for exceptional circumstances. Whole life plans generally mature at age 100. At maturity, the policy owner would receive the net cash value and coverage would discontinue. Term plans operate for a shorter period. They either mature after a set number of years or provide coverage up to a specific age. Some term plans provide coverage well into retirement. The longest term insurance that I know of provides coverage up to age 85.
Other differences between these plans arise out of these two fundamental differences. For instance, term insurance is a lot cheaper than whole life insurance because of the absence of cash values and the increased coverage period.
Another major difference is the non-forfeiture options available with whole life plans. These provisions cannot be entertained where term insurance is concerned. Due to the existence of cash values, whole life plans do not have to be fully surrendered and do not lapse easily. The non-forfeiture options available with whole life plans are; automatic premium loans, cash surrender and reduced paid-up permanent insurance. Term insurance plans generally lapse after the grace period. After this, the plan must be reinstated.
Whole life plans have more optional supplementary benefits than term insurance. This is because the premiums are high enough to sustain riders that are relatively cheap. Whole life plans have additional waivers of premium benefits and disability income. Refundable term plans may be the exception, since the insurer is aware that your money is being wasted.
Cash values also enable policy loans that are not available with term insurance. The permanence of whole life insurance makes it a likelier estate planning tool when compared to life insurance. The differences between term plans and whole life plans are numerous. However, they all arise from the two basic differences; cash value status and coverage period.