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There are two basic life insurance types. Whole life insurance and
term life insurance. Although there is a bewildering array of life insurance
policies out there they can be broken down into two types. The difference is
simple.
Whole Life Insurance
Life insurance that remains in force during the insured's
entire lifetime, provided premiums are paid as specified in the policy.
Whole life insurance also builds a savings element (called the cash value)
as a result of the level premium approach to funding the death benefit.
Term Life Insurance
The simplest form of life insurance, in which an insurer
promises to pay a certain death benefit if you die during the term for which
the policy is in effect. Types include annual-renewable and level-premium
term.
Advantages to Term Life Insurance
- Whole life insurance is expensive, due mainly to its investment
aspect, while term life insurance is very affordable. Whole life insurance
policies often cost thousands of dollars a year, as opposed to the mere
hundreds of dollars a year that the majority of term life insurance
policies cost consumers. For example, if you are a healthy, non-smoking 35
year old male, you can get 10-year, $100,000 term life insurance policy
for as little as $8.50 a month (or as little as $8.08 a month for a
comparable female).
- Term life insurance is simple to understand, and allows for personal
choice. You pay a (low) monthly premium based on the term length and
amount of coverage you choose. That's it. Simple. You can choose term
lengths such as 10, 20 or 30 years, and coverage amounts anywhere from
$100,000 to several million dollars.
- You can invest your hard-earned money yourself, rather than having an
insurance company do it for you (as with whole life insurance). Insurance
companies are often very conservative with how they invest your money. If
you are at all savvy in investing, or good at saving, the extra money a
whole life insurance policy costs may not be for you. Instead, buy a
cheaper term life policy, and invest the money you saved yourself.
- Term life insurance is good for short term needs. Two good examples of
this are to cover your children's college education, and to cover your
mortgage. Parents could buy a policy that expires after their children
graduate from college, to ensure that the full education was paid for in
case anything were to happen to the parents. Or, the main breadwinner in a
house could buy a term policy that matches the length of his or her
house's mortgage.
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