Term Life vs. Whole Life Insurance

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Term Life vs. Whole Life Insurance

The main two types of life insurance are term life and whole life, however, there is also universal and variable which are variations of whole life insurance.

The main two types of life insurance are term life and whole life, however, there is also universal and variable which are variations of whole life insurance.

Term Life

The difference between term and whole life is that term insurance covers you only during the life of the policy while you pay the premiums. If you have a 30 year term life insurance policy, pay your premiums for 25 years but stop paying and then die, the policy will not pay.

There are three types of term life insurance:

Level Term allows you to pay a fixed premium up to 20 years. This is a good deal because your premium will not change if your health changes for the worst and it protects you against the effects of inflation.

Annual Renewable Term gives you the option of renewing your policy regularly, however, at increasing premium rates.

Decreasing Term steadily decreases your death benefit. This may make sense for people who have a family when they are younger and are the breadwinner. As they grow older into retirement with adult children and a nest egg, they don’t need a large death benefit.

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Whole Life

Whole life insurance is designed to cover people for their entire life. Whole life charges a fixed premium each year and is typically higher than term life. The advantage sold by many insurance companies is that part of the premium resides in an account that pays interest and accumulates a cash value. The remainder of the premium covers term insurance. As the accumulation of cash grows in a whole policy the premiums can decrease and can eventually pays the premiums.

Unfortunately, whole life insurance tends to pay low interest rates to policyholders, while the insurance companies earn a much higher return because they invest the money in stocks and bonds. As an investment whole life insurance isn’t desirable to most.

Universal Life

Universal life is a form of whole life insurance that combines term insurance with a savings feature which is invested in a tax-differed account. In years when the insurer earns more on policyholders’ accumulation accounts than promised, they pass along the extra gain to policyholders. This may sound good, however, in some situations, customers can end up paying more than they expected because of overly optimistic assumptions insurance companies make about customers returns.

Variable Life

Variable life is also a form of whole life insurance that has a cash value that is invested in equity or debt securities. Policyholders can change and select different investment instruments. The insurance company guarantees a minimum death benefit amount, however, policyholders bears the risk of the securities investment.

Below is a chart comparing term, whole, universal and variable life insurance policies.

The 10 largest insurance companies are listed below:

American International Group

Berkshire Hathaway

UnitedHealth Group

WellPoint

MetLife

Allstate

Prudential Financial

St. Paul Travelers

Aetna

Hartford Financial Services

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