Whole Life Insurance and Term Life Insurance
Whole life insurance, also known as “whole of life” insurance, sometimes also referred to as “permanent life” insurance, or “ordinary life” insurance, is a life insurance contract that is secured by an amount of cash that has been paid or guaranteed to the insurer in the contract. In the event of the death of the insured, the insurer promises to pay the named beneficiaries a specified amount of money, called the face amount. The face amount is usually set at an amount equal to the total of all premiums paid or guaranteed by the insurer during the insured person’s lifetime. In some whole life insurance contracts, the premium may be paid in monthly installments, though in many cases the premium is paid in a lump sum payment, allowing the beneficiary to receive the full amount at once.
Premiums are paid either semi-annually, annually, or until the policyholder attains the age of 100. Death benefits are paid when the insured dies from a pre-determined natural or accidental cause. Beneficiaries may be children, relatives, friends, and sometimes even animals. Premiums and death benefits are made according to the risk of loss stated in the contract and the potential profitability of the plan.
A whole life insurance contract can also provide tax advantages. If the contract provides for a cash value or an investment option, then the proceeds from these options are subject to tax. Usually, if the beneficiary is not an individual, the proceeds are subject to estate tax. Some policies specify that the whole cash value is subject to estate tax. Therefore, if a policyholder dies, the beneficiaries would obtain a tax return.
An annuity contract provides for a fixed payment for a specified period of time. The premiums of whole life insurance are guaranteed. The return on the policy is guaranteed. If the insured party does not die during the period of coverage, the entire payment will be received.
With a whole life insurance offers no flexibility as to how the policyholder can pay the premiums. The guaranteed cash value makes it difficult to invest in other products that may give a higher return. Also, there is no flexibility as to how the account holders’ investments are invested. With term life insurance, there are more options available for investing such as stock investments and bonds. However, these alternatives carry greater risks and may offer a lower return on investment than a whole life insurance.
On the other hand, whole life insurance offers no flexibility in the premium payment options. Most policies are set in stone, which means that the same premium will always be paid for the same death benefit amount. There are some limited policy flexibility options, however. These include the choice between annual or monthly premiums, between an accumulation of a cash value and a guaranteed death benefit, between a single premium payment and variable premiums, and between lifetime payments versus a fixed premium payment. Additionally, most policies have lifetime income guarantees.
In contrast, term life insurance policies do allow flexibility; however, the most significant premium growth opportunities come with longer term policies. For this reason, whole life insurance is often used by those who expect to be in their homes for a long time. In this type of coverage, the death benefit is generally less than the death benefit of a term policy. In addition, term policies do not provide any savings or investment options, such as stock options and bonds. Term policies also do not provide the flexibility of a whole life policy. Finally, term policies are not renewable.
Generally, whole life insurance is used by the business or professional sector of society. As the name implies, this type of policy provides financial protection for the policyholder’s family for a set period of time. This protects the family from the policyholder’s death in the case of unforeseeable circumstances. It is, therefore, often used by entrepreneurs and executives who anticipate their death during a long illness or if they become incapacitated due to a debilitating disease. In some cases whole life insurance can also be used as a source of investment. The premiums are invested to guarantee a steady income for the family in the case the policyholder is unable to continue working.