Purchasing Life Insurance gives you peace of mind and provides financial security to your loved ones. Having life insurance provides assurance to your family that even when you pass away, they will still be able to live the life you have dreamed for them. When one of the family members dies, funeral costs can be a burden, as it is not cheap. Then they have to think about how to sustain their daily needs along with paying off debt and mortgages. These are just some of the financial worries of the surviving members of the family. Life Insurance lessens these burdens and gives financial assistance to the family members. We will discuss in this article the difference between the two most popular types of life insurance: Whole Life and Term Life.
Whole Life Insurance – whole life insurance provides insured party coverage during his lifetime given that the premium payments were regularly paid. This is a savings account too and can accumulate cash over time.
Term Insurance – term insurance covers a specific term or years depending on the policy applied. There is no cash value for this type of insurance.
Whole Life Insurance Elaborated
Whole Life Insurance is also known as Traditional Life Insurance or Permanent Life Insurance. The insured party is covered by the insurance for a lifetime as long as the premium payments are met regularly. This type of insurance builds cash value that the insured party can use while he is living. This is called the savings component of Whole Life Insurance.
The foundations of a whole life insurance policy are:
- The death benefit is guaranteed as long as premium payments are being paid regularly.
- Premium payments are constant during the life of the insured party regardless of age and health conditions.
- The insurance company is bound to the contract of the policy except when the insured fails to take care of his monthly premium payments.
- The cash value grows over time based on the interest rate in the market and this is an essential factor of a whole life insurance
Mutual Companies who also offer Whole Life Insurance pay out dividends to their clients. The cash value earned from your insurance can be used in different ways. You have the option to withdraw the dividends earned. You can also use the cash value earned from dividends as premium payments, to pay off policy loans or buy additional insurance products being offered by your insurer.
The insured party gains more benefits when the insurer has good performance in the market, interest rates increased. However, this is not guaranteed.
Five benefits of Cash Value or Savings Components of Whole Life Insurance:
- Increase insurance premiums resulting in an increase of the death benefit
- Use cash value as premium payments
- Policyholders can request for fund withdrawal or loan against the policy
- The cash value can be reinvested in interest-earning products
- Policyholders can terminate their contract prior to the maturity date and receive the cash surrender value of the insurance
Term Life Insurance Discussed
Term Life Insurance pays death benefits to the policyholders if they die within the term of the insurance. As the name suggests, this type of insurance can be purchased in specified terms or years, 5, 10, 20, or 30 years.
Upon the end of the specified term of the insurance, policyholders have the option to renew their insurance policy. However, premium rates will be recalculated based on your age and this usually ends up having higher premiums. Also, there is not much option for the term upon renewal as it is only for 1 or 5 years.
Most often, Term Insurance is bought by clients to ensure that their loved ones will not be burdened by loans, mortgages, or any other debts that will not go away with the policyholder when he dies. Professional Insurance Agents will provide financial analysis to maximize the benefits they can get from buying Term Life Insurance.
Analysis of future expenses and settlement of loans includes the following:
- Principal and Interest amounts of Mortgage Loans
- Other outstanding loans
- College Fees and Tuition of children or any outstanding Tuition Loans
- A safety net for daily needs of the surviving spouse and children
- Retirement benefits
These are considered when determining the desired death benefit within the specified term of the insurance policy.
The total of these current and future expenses less any available cash will determine the death benefit needed in the insurance policy.
Today’s term insurance policies offer insurance riders other death benefits.
Insurance Options or Riders are now being offered as an inclusion to a Term Life Insurance policy. This gives the policyholders other benefits that they can use while they are living. Some of the options being offered nowadays are the following:
- Accelerated Death Benefit – This is a cash benefit that the insured can use while he is living. This can be used to pay for medical expenses when diagnosed with a severe illness.
- Accidental Death Benefit – This is a provision in the policy that in cases when the policyholder dies from an accident, the death benefit that will be received by the beneficiaries is usually doubled.
- Waiver of Premium – This rider is the policyholder’s security in case of unemployment due to disablement. As such, he will not be able to pay his insurance premiums. This rider will waive the premium payments.
- Return of Premium – Upon the termination of the specified term of a Term Insurance, and the policyholder outlived the term bought, he will not get anything from the insurance company. With this rider, the insurance company will refund the premiums that were paid.
Please note however that adding options or riders to your Term Life Insurance will cost additional premiums but also lessen your risk of not getting any benefits when you outlive the term of the policy.
Term Life and Whole Life Insurance
Term Life and Whole Life insurance differ mostly on the amount of premiums being charged.
Below are example rates to show the comparability between Term Life and Whole Life insurance policies:
Term Life Insurance
Given:
Death Benefit = $200,000.00
Term: 30 years
Policyholder: Good health, non-smoker
These rates are based on the given situation above. Use our calculator in the margin of the page for other situations.
Whole Life Insurance
Given:
Death Benefit = $200,000
Coverage: Lifetime
Policyholder: Good health, non-smoker
These rates are based on the given situation above. Use our calculator in the margin of the page for other situations or contact us.
There is a compelling rate difference between Term Life Insurance and Whole Life Insurance. This is because, with Whole Life Insurance, the Insurer’s responsibility to pay for a claim is higher than that of a Term Life Insurance.
For more information about the difference between Whole Life and Term Insurance, contact the insurance professionals at BBI Financial during normal business hours at (800) 958-1525 or contact us through our website at your convenience.
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