The following is a guest post by Gary Dekmez. Gary is a writer and online blogger focusing on insurance and personal finance. For more information on whole or term life insurance policies, check out MyTermLifeInsuranceQuotes123.com and compare term life insurance rates online.
The two primary differences between term and whole life insurance are the price and the length of time the coverage is in effect. Term life insurance is temporary insurance which only covers the insured for a set period of time while whole life insurance is a permanent life policy which remains in effect throughout the insured person's lifetime. Another difference between term and whole life insurance is that whole life insurance accrues a cash value while term life insurance does not.
Term Life Insurance
A term life insurance policy is a legally binding contract between an insurance company and a policyholder. In return for the payment of premiums, the life insurance company agrees to pay the named beneficiary of the policy an agreed upon death benefit if the insured person dies within the term of the policy. The beneficiary may be a relative, a business partner, a lender or anyone else, usually with a financial interest in the insured's life. The beneficiary is designated by the policyholder.
The Policyholder and The Insured Person
The insured person is not necessarily the policyholder although in most cases the two are the same. A business may own an insurance policy on a key employee which would make the business the policyholder and the key employee the insured person. A policyholder must have a legal and financial interest in the insured person in order to purchase a term life insurance policy on that person. The beneficiary is designated to receive the death benefit and may be the policyholder or anyone else designated by the policyholder.
Basic Provisions of A Term Life Insurance Policy
Term life policies specify the time the contract will be in effect, usually between 5 and 30 years. They also specify the amount of the death benefit which is chosen by the policyholder and the name of the person whose life is insured. The policy only pays the death benefit to the named beneficiary if the insured person dies within the term, but if the insured person does not die within the term the policy expires and no benefits are paid.
Double Indemnity For Accidental Death
Many consumers believe that all life insurance policies contain a double indemnity clause. Actually, the double indemnity clause must be added to the term life insurance policy as a rider. Additional premiums are charged for this option and it only applies if the insured person dies of accidental causes not otherwise excluded in the main policy. For instance, if the named insured person pursues a dangerous hobby like skydiving and death caused by a skydiving accident is excluded, the double indemnity clause would not apply either.
Exclusions in Term Life Insurance Policies
All insurance policies have exclusions which are specified in the policy terms and conditions. Most term life insurance policies have an exclusion for suicide within the first two years of the policy and for death caused by acts of war. Other exclusions may be included in the general policy and a specific exclusion for death caused by a pre-existing health condition or high risk occupation may be added to a particular policy as a condition of issuance. Consumers should read all term life insurance policies before purchasing them.
Difference In Cost Between Term and Whole Life Insurance
Since whole life insurance is permanent, it guarantees payment of the death benefit no matter when the insured person dies. Term life insurance only pays a death benefit if the insured person dies within the term of the policy which is usually from 5 to 30 years. If the insured outlives the policy term, the company keeps the insurance premiums but does not pay any benefits. The reason that term life insurance is cheaper than whole life is because the insurance company may not have to make any payments under the policy.
Cash Value in Whole Life Insurance
Part of the premiums of whole life insurance is diverted into a savings feature called the cash value. In most cases the insurer guarantees a minimum interest rate on the money in the policy and policyholders may also receive dividends on an annual or semi-annual basis. Up to 90% of the cash value can be used as collateral for no interest loans. The difference between term and whole life insurance is that a whole life policy is a financial instrument which can be used in financial and estate planning.
No Cash Value In Term Life Policies
Unlike whole life, term life insurance policies do not accrue any cash value. There is a return of premium term life policy which pays back all the premiums to the insured person at the end of the term. The single payment includes accrued interest on the money, but the insured must outlive the policy term to collect. The policy cannot be redeemed for its cash value like whole life insurance since it has no value until it expires. Most term life insurance policies do not pay the insured person any money when they expire.
Permanent vs. Temporary Insurance
The biggest difference between term and whole life insurance besides price is that whole life insurance never has to be renewed or replaced. Term life policies expire and the insured person usually has to reapply for life insurance which becomes more expensive as he or she ages. However, the death benefit on whole life insurance is fixed at the time the policy is purchased and cannot be adjusted to meet changing life insurance needs while the death benefit on term policies can be changed when they are replaced.
The price difference between term and whole life insurance is substantial and many consumers cannot afford the higher premiums of whole life. Term life insurance is inexpensive and provides the same financial security for families in the event an income earner dies.