Term Life Insurance Vs Whole Life Insurance: Which Is Which?
Whole life insurance is also known as cash value and universal life
. It is the original kind of life insurance and has been around for about a hundred years. Term insurance, which is much less expensive and more affordable, is a fairly recent innovation. Here are the basic differences between term life insurance vs whole life insurance.First, let's talk about term insurance. It got its name because when you buy a term policy, you are covered for a specific "term". This term, or length, of the policy can vary between ten and 40 years and your age will usually dictate the length of the term for your policy, although some insurance companies only sell one type of policy such as ten year policies.
Term policies are very affordable as compared to whole life policies because with term, you are only paying for a death - or burial - benefit. Unlike whole life or cash value, you are not using your insurance policy as a form of savings or investment portfolio. A typical term policy is about 65% cheaper than the same policy purchased as whole life.
With term, however, if you survive the term of the policy, you don't get any refunds as some people think. You pay your premiums and the insurance company is gambling that you don't die during the lifetime of the policy. With whole life, your policy covers you for of course you whole life. The drawback is that you must keep paying premiums for the rest of your life, and if you took out your policy at an early age, you could actually be paying more than you should for a simple death benefit.
If you have a whole life policy, a major part of your premiums are used for your investment portion. The problem with this type of investment is that you only receive a tiny portion of any profits made from these investments. Your insurance agent will never tell you this, although it is clearly outlined (in small print of course) in the actual policy itself. If your agent is telling you that "your investment is assured to have a return of about 15% a year", he's probably right. What he doesn't tell you, however, is you will only see about 3% - the insurance company keeps the rest!
In reality, insurance should be nothing more than making certain your family has enough income to replace yours if something happens. Insurance should not be mixed with your investments.
Whole life payouts are confusing to the policy holders as well because, when the policies are originally purchased, the insurance agent rarely explains to the person what happens when a claim is made. With this type of insurance, you only get the death benefit. So when you die, any "cash value" built up is not sent to your family. What happens to it? The company keeps it! Again, this is clearly stated in the policy but the carriers know that people don't read these.
The only person who benefits from your whole life policy is the insurance agent who makes incredibly high commissions each month because you are overpaying for the policy.
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