Choosing the right life insurance policy for yourself may be one of the most important and beneficial choices you make in your lifetime- and the ramifications of that choice may have an effect well into the future.
There are a variety of life insurance options available to an individual with various options, stipulations, benefits and costs, and there are two types of life insurance in particular that attract many insurance seekers: Term life insurance and Whole-life insurance.
Term Life Insurance
Term life insurance, which is also known as term assurance life insurance, is a policy which is paid periodically at a fixed rate. The fixed rate could change from term to term, but is usually held constant. A term is usually measured in increments of five years, however terms may be anywhere from one to fifty year (or more).
During the five year term, the insurance policy premiums will remain the same, but once the term is finished the policy premium will usually change- which meant the policy premium usually would rise once the five year term was up (as the risk of payment increases). When a term ends, the policy is up for renewal, and the conditions of a term life insurance policy will also usually change with each term renewal and sometimes renewal of the previous policy does not occur.
Term life insurance is the least expensive form of life insurance, and thus is the most popular type. If the insured person passes away during the five year term, or whatever the term may be- the life insurance pay out would be passed on to whoever the beneficiary of the policy is. Term life insurance is also the oldest form of life insurance, and thus has the most history to research whether or not it is right for you.
The most important thing to consider about term life insurance is the risk involved with premium increases upon renewal dates. There is risk that at the end of a term, renewing the policy might involve considerable premium increases, depending on your health. It is also imperative to always pay premiums in a timely manner, since failure to pay is cause for termination of most policies.
In contrast to term life insurance, whole-life insurance does not expire until the insured individual’s passing. It’s important to note that the policyholder for any type of life insurance policy does not need to be the individual insured. Any individual may take out a policy on another person, though there are limits. In its most common situation, this happens when a spouse takes out a policy on their partner.
This difference, that the policy does not expire, means that the insurance company is guaranteed to pay a death benefit. Because this cost is a known event (the only thing not known is when), the cost of this type of policy is greater than for term life insurance. However, the benefit is assured.
There are many types of whole-life insurance policies, including participating, economic, single payment and limited payment. These are just a few; the list is long. Whole-life insurance policies often act more as investment vehicles with a term life insurance policy component than traditional (term) life insurance.
For most, premiums are contributed to the “cash-value” account, which is then used to pay for the term life insurance premium as well as to build up a balance for the death benefit. Upon the insured’s passing, the beneficiaries are either paid the amount of the cash-value of the plan or the stipulated death benefit. The exact details of such policies vary significantly and should be thoroughly understood before entering into these types of policies.
Term and whole-life insurance policies are the two most common forms of life insurance. The vast majority of people select term life insurance, and usually purchase an amount of insurance that is sufficient to either replace an income stream or to pay off a considerable liability (such as a mortgage). Terms are usually tied to the life of the replaced income stream (i.e. how long the insured would normally have worked) or to a specific event (e.g. when children reach adulthood).
Each situation is different though as is each individual’s needs. While most term life insurance policies are relatively standard, there are differences and it pays to both understand the specifics of your policy as well as to compare life insurance policies to find the most affordable policy for your situation.