Whole Life Insurance Explanation: whole life vs. term life

By Compuquotes Team on October 15th, 2009

When you are shopping for life insurance, get all the facts so you can make an informed choice between whole life and term life insurance.

When you shop for life insurance, the first thing you probably look at is price. A quick comparison shows that a whole life insurance policy does cost more than a term life insurance policy. But the difference between whole life and term life is not just cost, they have vastly different benefits. Life insurance is not one-size-fits-all. You have to look at your current situation and decide what type of life insurance--whole life or term life--is right for you.

Term vs. Whole Life Insurance

A term life insurance policy is quite simple; if you buy a $250,000, 10-year policy, your beneficiaries receive $250,000 if you die within the 10 year period of the policy. If you do not die, you can renew or buy different coverage. Or you may decide you don't need life insurance anymore because you have enough savings to take care of your family. Keep in mind that re-insuring after 10 years may be considerably more expensive because premiums greatly increase with age. You may have to prove you are still healthy enough for term insurance.

Whole life, on the other hand, pays the benefit amount to your dependents regardless of when you die. For this reason, whole life insurance is also referred to as guaranteed life insurance or permanent life insurance. A portion of the premium you pay goes into a cash account, which acts as an investment and grows over time with dividends paid to the account by the insurance company. You can borrow against the account, withdraw the dividends from the account, or you can leave them there to increase the account; often these dividends are used to purchase additional insurance. You should also be aware of these differences between whole life and term life:

  •  Whole life insurance covers you regardless of your health.
  •  With whole life, if you pay your premium, your life insurance cannot be cancelled by the insurance company for any reason.
  •  Term life insurance generally requires a medical exam and medical history (you can get a policy without an exam, but it's expensive).
  •  If the term life insurance company finds that you were not completely honest on your application, they can cancel your policy or deny payment to your beneficiaries.

Additional Benefits of a Whole Life Insurance Policy

A whole life insurance policy also has the following additional benefits:

  • You can add a waiver of premium disability rider; if you become disabled the insurance company pays your premium until you are healthy enough to return to work or for the rest of your life.
  •  You can also add a rider for accidental death, which pays twice the benefit amount if you are in a fatal accident.

Term life insurance and whole life insurance have different benefits. In order to make an informed decision about which type of insurance is right for you, look at your personal situation, and research information about rates and individual policy requirements.

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