What is the difference between Term and Whole Life Insurance?

The question of the most generally beneficial life coverage can be answered in one word: term. Let us take a look at the most common types of insurance offered in the market. The basic difference between term and whole life insurance is as follows: a term plan is pure coverage. The named beneficiary is given the face value of the plan on the death of the purchaser.

Term coverage can be issued for one year and for up to thirty years. Whole life insurance has a death benefit along with an investment feature. The investment can be in stocks, money market or bonds. This plan generates a cash value against which you can borrow. The three basic forms of whole coverage are variable, universal and traditional coverage.

With both term and whole life, one can lock monthly payments through the term of the policy. Whole life, however, costs more. The insured person is not only paying for the death benefit but also for generating a cash value. Provided it is a good investment vehicle, it is worth paying extra for these policies. But it is not usually the case.

If we leave aside the fact that there are more effective ways to save for retirement, there are high commissions and fees associated with these plans, which in some cases may be up to 3% of the annual return. Moreover, there are hidden up-front commissions that usually comprise the entire cost of premium for the first year. Other than that, there is no way to find out the return on investment, so the purchaser cannot find out how much money goes towards investment and towards insurance.

Difference between Term and Whole Life Insurance

Premium costs for term coverage are almost negligible provided you have maintained good health and are less than 50 years of age. Above that age premiums progressively increase and become expensive. The same applies for whole coverage; people who are purchasing coverage at the age of 60 may not have any other alternative but to enroll in whole life. Term plans are simply not available to people above the age of 65.

A 40 year old male non-smoker has two options available to him: A $250,000 universal plan with an annual premium of $3,000 or a 20 year renewable term coverage with a $350 fixed premium.

Assuming the universal plan paid 5.7% in a year, tax-free, it will have no cash value after one year. Let us suppose that the person invested $2,650 (the difference between universal and term premium) in a mutual fund that provided a return of ten percent annually. By the end of the year, the person will have $2,841, and after ten years $46,000 will accumulate in the account after tax in a mutual fund. In the same period, the policy can generate only $31,819 of cash value.

This does not mean that whole life coverage is not good. Rich people can enroll in whole life, which is used for estate planning that sets up an insurance trusts to pay for the estate taxes through the proceeds received from the plan. For people who are moving towards their 40s or 50s and have just started a family, this plan is of real worth.

Before enrolling in whole life, you should consult a financial expert and find out if the policy you are considering or the one they have makes for a decent investment. Whole life plans are not of much worth unless they are run and kept current for at least twenty years or more. So people who are planning to enroll in one should make sure they pay into it for a long time.

The real value of whole life insurance comes when we deduct the fees and charges from the rate of return. A thorough analysis will help to determine whether the charges and fees built into these plans allow for a worthwhile return. You can also find out the minimum value of cash that can be returned from a plan at any time.

First and foremost, you should bear in mind the amount of money paid over the years, and analyze how much will you get if you surrender the policy or cash it out. People who are not able to determine the surrender value on their own will have to consult an insurance agent. But before you arrive at any conclusion it is worth making the effort.

The Cash Value Difference between Term and Whole Life Insurance

The majority of plans do not develop a decent cash value until they are run for at least twelve to fifteen years. If you cash it out after ten years you will lose a considerable amount of money. The biggest difference between term and whole life is that people who surrender the policy in its first five years can be sure that every dime they invested will go down the drain.

Find out if you can find coverage at a reasonable rate as you make the switch. This is because you have to go through the medical examination again. Smokers above the age of 50 and people with health issues may find it sensible to carry on with their current plan.

When you are analyzing the difference between term and whole life insurance, you should also analyze the financial stability of the insurance provider. You have to make sure that they will still be there when your policy matures or you die. With the advent of the internet it is quite easy to know the credit worthiness of an insurance provider.

One can also contact the provider to ask their credit rating, but it is best to get this information from an independent agency. In general, go for companies that are rated A or better, the best rating is AAA, although every agency uses its own grading system and letter to rank it. Make sure that the reports you are going through are current or issued within the last six months.