Difference between Whole and Term Life Insurance

Life Insurance is basically a method to secure your life against emergencies through health benefits and the likes. Life Insurance is nothing but ensuring your life against any oddities, which might enter our lives unknowingly.

While choosing a life insurance policy, you can either opt for a term life or whole life insurance policy. The basic difference between the two is the period, for which the insurance qualifies. While whole life insurance covers your whole life, term life insurance, on the other hand, is for a limited period.

Whole Life Insurance: When the concept was introduced, Term life insurance meant that the insurance can be claimed only after the death of the insured person. It was not considered convenient by the policy holders. So to suit the market and the policy holders, professionals dealing with the financial effect of risk and uncertainty came up with an insurance policy with level premium payments, which were more than traditional term insurance contracts. This was a win-win situation for both the policy holder as well as the insurance company. The policy holder was assured of insurance coverage and the insurance company benefited through every premium paid, which reduced the cost of insurance.

Whole life insurance policy remains in force for the lifetime of the person insured. It necessary to pay premiums every year for the policy. There are different types of whole life insurance policies. They are participating, non-participating, economic, indeterminate premium, limited pay, single premium and interest sensitive. The requirements are very nominal, the owner has to pay premiums every year to the policy. Moreover, the company generally guarantees that the policy's cash values will increase, irrespective of the company's performance or its experience with death claims.

Term Life Insurance: Term Life insurance, on the other hand, provides a coverage for limited period of time. If the insured individual wishes to continue, he or she can annually pay increasing premiums. The other option would be to discontinue the policy. It builds no cash value so it is considered to be pure insurance protection. The fundamental use of term life insurance is to provide cover for financial responsibilities as its benefits are applicable after the death of the insured person. These financial issues can be dependent care, education, debt, funeral costs and mortgages.

The most elementary type of term life insurance is for one year. Although it sounds very crude, it means that if the insured person dies within the validity period of the policy, the insurance company has to pay the death benefit. If the insured person dies even a day after the expiry of the term, it does not pay the death benefit.

Annual renewable term is a variation of term insurance which is often purchased. Here, for one year of coverage, premium is paid and there is a guarantee of the policy being continued each year for a given period of time.

Differences between Whole and Term Life Insurance:

• In all probability, the term life insurance will be cheaper than the whole life insurance.
• Whole life insurance can get you into financial trouble if the insurance company goes downhill.
• When it comes to whole life insurance, the person who owns the policy can get back some amount of the money invested. When a term life insurance is over, the insured person is left with nothing.
• Term life insurance is perhaps more suited for the young, whereas the elders possibly opt for a whole life insurance plan.
• Whole life insurance plan builds cash value, on the contrary to term life insurance, which does not create cash value.

Both the life insurance schemes have their pros and cons. It is entirely upon the individual to chose which one is the best amongst these two.