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Term versus Whole Life Insurance

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What are Term Life Insurance and Whole Life Insurance?

Life insurance can be broadly categorized into two types: term life insurance and whole life insurance. Both the insurance types have one thing in common – insurance against the unfortunate event called death. So, what is the difference between the two? While term life is insurance coverage only for a specific term ranging from one to thirty years, whole life is insurance coverage valid for your entire lifetime, provided you keep the policy active by paying premiums within the specific timeframe. An inherent difference between the two is that term life insurance offers only a death benefit, while whole life insurance also has a cash value.

Differences between Term Life and Whole Life Insurance:

Apart from the basic difference mentioned above, there is a distinction between term life and whole life in terms of the financial returns your beneficiary will ultimately receive. Since term life insurance is designed to provide pure insurance within its term only, the beneficiary would not receive any insurance benefit in case the insured person dies even a day later than when the policy lapses. However, this would not be the case in whole life insurance, wherein your insured amount will not get wiped off as long as you have been paying the premiums on time.

To ensure that your insured amount does not go for a toss in term life, you can renew the term of your policy. However, its premium amount, which is usually low initially, is recalculated every time the insurance is renewed and the amount is usually raised to reflect the state of your health. This is not the case with whole life insurance, where the premium amount remains constant throughout and may even decline.

Moreover, while term life is pure insurance, whole life combines a term policy with a cash component. This cash component is invested by the insurance company in bonds, stocks or money-market instruments. This cash value continues to grow, with interest getting accrued. The policy builds cash value against which you can borrow in time of emergencies. Another benefit of this accumulating cash is that your premiums can decrease over time and can even be done away with if the interest earned on the cash component is high enough to substitute the premium amount.