Difference Between Term and Whole Life Insurance

Life insurance is an absolute necessity in life today and one must have life insurance, either as an investment or saving measure, or as a prudent way to provide for your family after you are gone. Whatever the motivations for agreeing to a life insurance policy, one has to make sure that he gets the right one for himself, by knowing about all the various types of life insurance that are made available by the insurance companies. Two such types of life insurance are term life insurance and whole life insurance. Before we move on to the difference between both the terms, let us first have a look at both of them, in their individual standing.

Term Life Insurance Definition
Also known just as term assurance, this is a life insurance policy that offers a limited period coverage at fixed rate periodic payments. Once the term period of the insurance policy expires, the insured individual has one of two options. He can either renew the insurance coverage, obviously at terms that are undated with the current insurance treads at that time period (i.e. changed insurance premiums) or he can go without any further insurance cover. Should the insured individual pass away when within the insurance term, the beneficiaries that he/she has nominated stand to gain the insurance payout.

On the other hand though, as there is no guarantee of insurance policy renewal with term life insurance, the insurance company may easily refuse to insure the individual again, or quote impossibly high premiums, if the individual were to contract a terminal illness during the term period (as he has just contracted the fatal illness and hasn't yet died of it). There are certain policies however, that offer guaranteed renewal, but once again, as the premium quotation is in the hands of the insurance company, if they should wish not to re-insure you, they can easily do so by quoting abnormally high insurance premiums.

Whole Life Insurance Definition
Also known as 'whole of life' assurance, this insurance insures an insured individual for the whole of his life, right from the day he agrees to the insurance contract and pays the first premium, till the time he passes away. With whole life policies the premiums are required to be paid annually, without default, each year. The beneficiaries of the insured individual get the insurance payout in the event of the insured individual's death, just like they do under the term life insurance policy (if the death is within term). The pros and cons of this insurance depend on the type of insurance chosen.

Some people even take up whole life insurance as an investment and this is because of the return on investment. With it, the premiums charged by the insurance companies are normally higher in amount and this is because they give the guarantee of investment increment. In other words, most whole life policies guarantee that the premiums paid into them will grow, irrespective of how the company fares or how many claims it has to pay out each year. The higher insurance premium is a small cost for this guarantee according to most people going for this type of policy and the insurance company is happy to be providing this guarantee as the extra charges that it asks for are more than enough to cover this obligation as well as some profit amount.

The Difference
There are several differences between term life and whole life insurance and these are listed below.

• Term life insurance is more often than not cheaper than whole life. This makes sense as it only insures an individual for a certain term period while whole life insurance is literally for the whole life of the individual. As whole life insurance guarantees growth of the premiums paid into it, the cost of whole life policy is set higher to provide for this facility.
• If you are going for whole life plan as an investment, be sure that you are aware of the pitfalls. Though it is rare, if an insurance company were to come down, your policy can suck you deep in financial trouble.
• If your investment horizon is just about or below 10 years, you have no option but to go for term life insurance. Whole life insurance is for longer term policies, more specifically, 10 years and beyond.
• With term life, as horrible as it sounds, you actually lose out if you are alive at the end of the term. You will not get a single penny back from the premiums you have paid to protect yourself throughout the term. On the other hand, with a whole life policy plan, the policy holder can get a refund of some of his premium money (amount invested).
• If you are young, you can choose a term life plan, but if you are old, a whole life insurance plan should suit you best for several reasons, like you may not get another insurance as you age further, you may not get low premiums as your health suffers, etc.
• Last but not the least, while whole life insurance actually builds on the amount of premiums and brings something called cash value build-up, term life insurance does nothing of the sort.

That's it from me on the difference between term and whole life insurance. Hope you got your confusion sorted out.