What’s the Difference between Term and whole Life Insurance

Term life insurance does not build any cash value. Regardless of how long you own a policy you will never be able to use it to draw down cash. Whole Life Insurance does build cash value and pays a lump sum upon the death of the policy holder to the beneficiaries.

Unlike Term Insurance, Whole Life Insurance may also pay sooner than death – in certain cases (specifically terminal illness); the contract may also pay a lump sum to the policy holder to meet financial needs.

Term life policies may be for periods of only one year and according to most sources this is the most typical term. The only time a death benefit would be paid on this type of policy is if the policy holder died while the policy was active. It’s pretty unlikely that anyone would take out a policy and die within the year, it’s statistically improbable.

Term policies are sometimes renewable. The term may start as one year but may be renewable either until a certain age or in increments up to thirty years. One of the downsides of this type of policy is the increasing premium. Unfortunately it is not uncommon for the premiums to exceed the cost of a new policy that doesn’t have the same restrictions as a term policy.

While a Whole Life Policy may guarantee a cash value that increases, term life offers no such provision. While life insurance policies may also used as collateral against a loan since they may be considered a liquid asset. One benefit of taking this type of a loan is that it is generally tax free up to the balance of the premiums that have been paid. One of the downsides of a loan against a whole life policy is that if the policy holder dies and there is an outstanding balance, the balance of the loan is deducted before death benefit is paid to the beneficiaries.

Even though a Term Life Insurance policy is more appealing to some people because the premium is lower, it’s better if you investigate and see if the policy is able to be exchanged (or converted) into a Whole Life policy.

Before you decide if a Term Life or a Whole Life Insurance policy is right for your personal needs you should consult with an insurance specialist and make sure you understand the restrictions of both types of policies.

You can read more information about Whole Life and Term Life policies by reading Term or Whole Life.