Life insurance is an absolute necessity in today's life, and one must have it, either as an investment or saving measure, or as a prudent way to provide for your family after you are gone. Whatever the motivations for agreeing to a policy, one has to make sure that he gets the right one for himself, by knowing about all the various types of policies that are made available by the companies. Two such types include the term and the whole life insurance.
Term Life Insurance
Also known as term assurance, this is a policy that offers a limited period coverage at fixed rate periodic payments. Once the term period expires, the insured individual has one of two options. He/She can either renew the coverage, obviously at terms that are undated with the current insurance trends at that time period (i.e., changed premiums), or he can go without any further cover. Should the insured individual pass away within the term, the beneficiaries that he/she has nominated stand to gain the payout.
On the other hand though, as there is no guarantee of policy renewal with this type, the company may easily refuse to insure the individual again, or quote impossibly high premiums if the individual were to contract a terminal illness during the term period (as he/she has just contracted the fatal illness and hasn't yet died of it). There are certain policies, however, that offer guaranteed renewal, but once again, as the premium quotation is in the hands of the company, if they should wish not to re-insure you, they can easily do so by quoting abnormally high premiums.
Whole Life Insurance
Also known as 'whole of life' assurance, this policy insures an individual for the whole of his/her life, right from the day he/she agrees to the contract and pays the first premium, till the time he passes away. With whole life policies, the premiums are required to be paid annually, without default, each year. The beneficiaries of the insured individual get the payout in the event of the insured individual's death, just like they do under the term assurance policy (if the death is within term). The pros and cons of this insurance depend on the type chosen.
Some people even take this policy as an investment, and this is because of the return on investment. With it, the premiums charged by the companies are normally higher in amount, and this is because they give the guarantee of investment increment. In other words, most whole life policies guarantee that the premiums paid into them will grow, irrespective of how the company fares or how many claims it has to pay out each year. The higher premium is a small cost for this guarantee according to most people going for this type of policy, and the company is happy to be providing this guarantee, as the extra charges that it asks for are more than enough to cover this obligation as well as some profit amount.
- Term assurance is more often than not cheaper than whole life. This makes sense, as it only insures an individual for a certain term period, while whole life is literally for the whole life of the individual. As it guarantees growth of the premiums paid into it, the cost of whole life policy is set higher to provide for this facility.
- If you are going for whole life plan as an investment, be sure that you are aware of the pitfalls. Though it is rare, if a company were to come down, your policy can suck you deep in financial trouble.
- If your investment horizon is just about or below 10 years, you have no option but to go for term life. Whole life is for longer term policies, more specifically, 10 years and beyond.
- With term life, as horrible as it sounds, you actually lose out if you are alive at the end of the term. You will not get a single penny back from the premiums you have paid to protect yourself throughout the term. On the other hand, with a whole life assurance, the policy holder can get a refund of some of his premium money (amount invested).
- If you are young, you can choose a term life plan, but if you are old, a whole life plan should suit you best for several reasons, like you may not get another insurance as you age further, you may not get low premiums as your health suffers, etc.
- Last but not the least, while whole life actually builds on the amount of premiums, and brings something called cash value build-up, term life does nothing of the sort.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.