Term Life Insurance Articles
The Basic Differences Between Whole Life And Term Life Insurance
2010-09-04
Life insurance is something that nobody really likes to talk about but really should know about. It is the simplest and yet the most effective way to protect a family against the unexpected loss of the primary income earner. There are two basic forms of life insurance: term life insurance and whole life (which includes both universal and variable). What is the difference? Simply put, with term life insurance, you are covered for the face value of the policy as long as you pay the premiums agreed to when you bought the policy. If you stop paying, you lose the benefit. Those premiums may be constant, or may increase over time, depending on the specific type of term life you have chosen. Whole life can be viewed as an investment that will grow in value while providing a predetermined death benefit for life.
Unlike term life policy premiums that vary on policy renewal, the premiums for whole life policies are fixed at a yearly rate that is considerably higher for the same death benefit. A portion of the premium is designated as payment for the insurance part of the policy; the balance is used, on your behalf, by the insurance company as investment capital. In effect, you are investing your money into an account that pays you a predetermined rate of interest and grows over time. When a sufficient balance has accrued in your account, the interest earned can be used to pay all or part of future premiums. As a rule, the interest rate paid by the insurance company is low. The company generally earns considerably greater returns on its own investments of policyholders' money than it pays out. For this reason, whole life is not considered to be a superior investment choice.
Another option to term life insurance is a variation of whole life called "universal" life insurance. Universal life will pay a greater return to the policyholder in years when returns exceed expectations. The advantage to this type of policy is obvious; the potential downside is not. It is not uncommon for an agent selling universal life to overstate the projected returns in order to sell the policy. When the actual returns are lower than the amount on which the annual premium was originally calculated, the policyholder is responsible for the difference in the form of higher premiums.
Whole life policies calculate their premiums on the basis of projected rate of return on their investments. Greater estimated return equals lower premiums. Make sure that your carrier's projections are realistic. If you are told that your rate of return will be significantly higher than that of the 30-year Treasury bond, be skeptical.
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Life insurance is something that nobody really likes to talk about but really should know about. It is the simplest and yet the most effective way to protect a family against the unexpected loss of the primary income earner. There are two basic forms of life insurance: term life insurance and whole life (which includes both universal and variable). What is the difference? Simply put, with term life insurance, you are covered for the face value of the policy as long as you pay the premiums agreed to when you bought the policy. If you stop paying, you lose the benefit. Those premiums may be constant, or may increase over time, depending on the specific type of term life you have chosen. Whole life can be viewed as an investment that will grow in value while providing a predetermined death benefit for life.
Unlike term life policy premiums that vary on policy renewal, the premiums for whole life policies are fixed at a yearly rate that is considerably higher for the same death benefit. A portion of the premium is designated as payment for the insurance part of the policy; the balance is used, on your behalf, by the insurance company as investment capital. In effect, you are investing your money into an account that pays you a predetermined rate of interest and grows over time. When a sufficient balance has accrued in your account, the interest earned can be used to pay all or part of future premiums. As a rule, the interest rate paid by the insurance company is low. The company generally earns considerably greater returns on its own investments of policyholders' money than it pays out. For this reason, whole life is not considered to be a superior investment choice.
Another option to term life insurance is a variation of whole life called "universal" life insurance. Universal life will pay a greater return to the policyholder in years when returns exceed expectations. The advantage to this type of policy is obvious; the potential downside is not. It is not uncommon for an agent selling universal life to overstate the projected returns in order to sell the policy. When the actual returns are lower than the amount on which the annual premium was originally calculated, the policyholder is responsible for the difference in the form of higher premiums.
Whole life policies calculate their premiums on the basis of projected rate of return on their investments. Greater estimated return equals lower premiums. Make sure that your carrier's projections are realistic. If you are told that your rate of return will be significantly higher than that of the 30-year Treasury bond, be skeptical.
