Term Life Insurance: Payout And Differences

By Sanford Ellowitz on April 7th, 2010

If you have compared quotes for term life and whole life insurance policies, you may have noticed that there is a significant difference in the cost for the same amount of coverage. Although both policies provide life insurance protection, there are several differences between whole life insurance and term life insurance that are the cause for the price disparity.

Main Differences

Although both types of life insurance provide insurance protection, a term policy provides insurance coverage for a specified period of time. The insurance company that issues the policy pays a death benefit if the insured passes away within that stated time period. However, if the insured individual outlives the policy's term, the life insurance coverage ends.

On the other hand, whole life insurance provides insurance coverage for a lifetime. As long as premiums are paid, keeping the policy in-force, there is a guaranteed payout to beneficiaries when the policyholder passes away.

The difference in price between term life insurance and whole life insurance reflects the difference in risk that the insurance company assumes. With term insurance, the company calculates the possibility of payout, but only for a limited time period. With whole life insurance, the insurance company knows that there is a payout in the future, and that it is just a matter of when that payout occurs.

The Type of Term Policy Can Affect Cost

When comparing costs between term and whole life policies, keep in mind that premium rates differ depending on the type of term policy, the length of the term, as well as any additional riders, or amendments that alter a policy's coverage or terms.

For example, you can see variations in premium pricing when looking at various term lengths. Term insurance premiums are based on the length of the term period. Therefore, a 10-year term policy costs less than a 20-year term policy, which in turn costs less than a 30-year term policy.

This means that if you compare a whole life policy to a 10-year term policy, the difference in cost is greater than if you compare a whole life policy to a 30-year term policy. The greater cost for a policy with a 30-year term compared to one with a 10-year term is due to the increased possibility of the insured passing away within the next 30 years, compared to the comparative risk of the same individual passing away within the next 10 years.

Whole Life Insurance: Added Features

Term life insurance is often thought of as pure life insurance coverage because this type of policy provides life insurance coverage for a specific period of time. Term life only provides insurance coverage and does not build up cash value, and therefore is less expensive than whole life insurance.

On the other hand, whole life insurance provides life-long coverage and has additional features that term life does not include, which is why the premiums are more expensive. Here are some of the added features on a whole life insurance policy:

  • Cash Value: Whole life includes an investment feature called cash value. Each time you pay your premium the insurance company sets aside a portion of the proceeds to cover the cost of insuring your life. The remaining premium is then put into an interest bearing account and builds cash value. The cash value accumulates over time through your premiums payments and credited interest
  • Dividends: Whole life insurance policies that earn dividends are called participating policies. Dividends are sometimes paid to policyholders as a kind of premium rebate, and are issued when the insurer experiences better than expected returns, or favorable mortality and expense savings. The amount of the dividends varies and is not guaranteed. If you do receive a dividend, you can use the proceeds to purchase more coverage, to cover future premium payments, or you may receive your dividend in the form of cash
  • Surrender Value: If you no longer need coverage or stop paying your premiums, your whole life insurance policy returns your cash value to you--minus any applicable surrender fees. With standard term insurance, if you stop paying your premiums or reach the end of the policy's term period, you do not receive back any cash back.

Weigh the Costs

When deciding between term life insurance and whole life insurance, it's not just the amount of the premiums you pay. A whole life insurance policy may seem to be more costly, but the benefits of a guaranteed lifetime payout and a cash value may outweigh the difference. However, you should also balance how much insurance you need, compared to your ability to pay your premiums, and take into consideration how long you need life insurance coverage.

Term life insurance gives you the most coverage for your money, whereas whole life insurance builds up cash value and provides a guaranteed death benefit, no matter when you pass away.

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