| Topic - The Central Debate: Term vs. Whole Life Insurance | Education Center |
There are different types of term policies. Level term provides a consistent amount of insurance. Decreasing term, which is an ideal type of insurance to cover any shrinking debt obligation, starts with a specified face amount which decreases annually until it reaches zero at policy expiration. Increasing term provides a growing amount of insurance, but the need for this type of protection is rare.
Many term policies are renewable, which means they may be renewed without providing evidence of good health until a specified age. However, because of an insured's advancing mortality (increasing chance of death at higher ages), renewal premiums will always be higher than previous premiums. Many term policies are also convertible, which means they may be exchanged for another type of policy, such as whole life.
Whole life insurance, sometimes called straight life or permanent life, is protection that can be kept as long as you live.
You can choose to pay a premium that doesn't rise as you grow older, averaging the cost of the policy over your life.
Whole life insurance has a "cash value" or the sum that grows over the years with taxes deferred. If you cancel the policy, you receive a lump sum. You pay taxes only if the cash value plus any dividends exceeds the sum of premiums paid, according to the American Council of Life Insurance.
Whole Life Accumulates Value
Whole life insurance is a permanent form of insurance protection that combines a death benefit with cash value accumulations. The face amount is constant, and this amount would be paid if the insured dies at any time while the policy is in effect. Premium payments are fixed and remain the same from the original effective date to the maturity date. The policy is designed to mature at age 100-the age when premium payments would end and the cash value would equal the face amount. At maturity, the face amount would be paid to an insured who is still living.
Although whole life policies are among the most common forms of life insurance sold, most individuals do not plan on paying premiums until age 100. Many of us do not expect to live until that age. More commonly, whole life insurance is used as a form of level protection during the income producing years. At retirement, many people then begin to use the accumulated cash value to supplement retirement income.
This type of life insurance plays an important role in financial planning for many families. In addition to the death benefit or eventual return of cash value, the policy has some other significant features. During a financial emergency, policy loans may be taken and the full policy values may later be restored. If the contract is a participating policy, it may also pay dividends.