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What You Need to Know About Term vs. Whole Life Insurance

What You Need to Know About Term vs. Whole Life InsurancePurchasing life insurance is something that most Americans will consider at some point in their lives. But what type of policy should you purchase? There are so many to choose from including term, universal, and variable life insurance. This article explores the differences of term and whole life insurance policies.

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All life insurance policies are divided into two basic categories: term life and whole life. They differ in many ways including how benefits are paid, the cost of premiums, and the eventual real value of policy. Knowing the differences will help you make a wise decision regarding term vs. whole life insurance.

Term vs. Whole Life Insurance: A Definition of the Policies

Before the question of term vs. whole life insurance can be answered, we must define the two types of policies. Term life insurance is a limited policy with an expiration, in which the customer pays a static premium in exchange for a guaranteed death benefit should he or she pass during the term. Term life insurance is the most common form of life insurance. In fact, at one time it was the only option available.

Whole life insurance is a policy which remains in force for the entire life of the policyholder as long as premiums are paid. It is considered permanent life insurance and requires payments be made into it for the entire life of the policy. The nature of whole life insurance means terms and conditions generally do not change after the date of issue.

The Cost of Term vs. Whole Life Insurance

Term life insurance is by far the least expensive all life insurance options. This is due to the fact that the term model greatly reduces the risk to the insurance company, who needs to invest your premiums in such a way as to guarantee they will earn more money than they pay out at your death. By limiting the policyholder to a limited term, they are able to play the numbers and bring in enough cash to make their investments profitable.

Whole life insurance tends to cost more because of the permanent nature of the contract. While premiums are not terribly unaffordable, they are definitely higher than those of term life insurance.

Perhaps you’ve seen television commercials advertising life insurance for under $50 per month. Some companies even offer it for as little as $15 per month. This is, in part, due to the type of insurance product you purchase.

The Benefits of Term vs. Whole Life Insurance

The paid benefits of these two types of insurance are what distinguishes them from one another. With a whole life policy, premiums and death benefits are agreed upon at the start of the contract. Under normal circumstances death benefits will not change.

Policy holders will have the confidence of knowing that what they were promised at the start of the policy will come to fruition upon their passing. Death benefits for whole life insurance also tend to be higher than for term.

The term policy is generally designed to cover funeral expenses and leave you with some additional cash for your beneficiaries to live on. Should you survive for the entire length of the term, you’ll be presented with terms and conditions for a new term, or be forced to drop coverage.

Universal life insurance and variable life insurance are two different kinds of whole life policies. These policies have what is called a cash value. As the investor continues to pay in to his life insurance, the combination of these premiums and the interest earned increases the cash value.

The cash value of the policy is what is paid to the beneficiary upon the death of the insured. So while whole life insurance premiums are more expensive, the death benefit is likely to be much more substantial when the time comes.

Tax Issues Related to Term vs. Whole Life Insurance

There are no tax issues related to term life insurance because it is a product you purchase; just like something you buy from the supermarket. With whole life insurance, there may be tax liabilities depending on the type of policy you purchase.

The variable life insurance policy for example, is considered by the IRS to be an investment. Therefore, policy holders will pay taxes on the earnings. How tax issues affect your life insurance policy is a matter to be discussed with your insurance agent or tax adviser.

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