Careers & Education

Term vs whole life insurance

By George Garza
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To meet some of the issues with term insurance, whole life insurance was created to provide permanent coverage that allows the policy-holder to build up a cash reserve
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How do you place a financial value on yourself?

As things go, we all have one thing to look to at the end: death. But how that is handled financially is different for all of us. Some don't care about how their finances end up at the end. But if you have a business or a family, then you may care or those around you may care.


Statistical tables have been created that provide a good indicator about when you will die. If you are young, the likelihood is small that you will die soon. But as you get older, the likelihood is greater. And if you are very old, the likelihood that you will die soon gets very high indeed. So how do you put a financial value on your life? And do you know what term vs. whole life insurance means in that equation?

Term Life Insurance

Term life insurance asks two questions: When will you die and what is the price of the insurance? And the answer is, if it will be years and maybe decades before you will die, then the price of the insurance will be very cheap.


If on the other hand you are older, then the premium for the insurance is high because the likelihood of you dying soon is higher. But the premium for term life insurance changes every year because your age changes every year. Term life insurance gets more expensive as you get older. Furthermore, as you get older, you may not qualify for life insurance due to health reasons.


Whole Life Insurance

To meet some of the issues with term insurance, whole life insurance was created. First of all, it is permanent and the premium does not change. It is more expensive than term insurance but it builds up a cash reserve which can be used to increase the value of the policy or to pay the premium on the policy.


You also don't have to submit to any other medical tests; if you have qualified for the insurance policy medically speaking then your beneficiary will not be denied the death benefit. Term insurance has only a death benefit. Whole life insurance has a death benefit plus a cash benefit.

New Forms of Life Insurance

Because the premium amount paid the policy holder results in a contract with no financial obligation to the beneficiary until the death of the policy holder, insurance companies are replete with money from premiums. Many will invest in stock or mutual funds to improve the cash value of the policy. How that occurs is the basis of variable life and variable universal life insurance policies. The consequences for the premium and the cash value disbursement are important.

Variable Life

Variable life has a fixed premium for the life of the policy. The disbursement amount of life insurance is fixed at a minimum guaranteed level. The actual amount varies only as a result of positive and negative investment results above the initial guaranteed amount. The unique advantage of variable life is that, even if investment results are poor, you will never be asked to pay a larger premium than originally contracted for, nor can the face amount of your policy decrease below that at which you originally purchased it.


For example, if you bought a policy for $50,000 at $30.00 per month, the benefit may increase to $55,000 but the premium will stay at you purchased amount. Even if the underlying sub-accounts used for investment purposes rise or fall, your premium won't rise and the benefit amount may rise but not fall below your original benefit amount.


Variable Universal Life

Variable universal life is like variable life except that the face amount and premiums can rise or fall. These policies are more flexible and customizable than variable life policies and can be more easily adapted to your situation. Your $50,000 policy for $30.00 per month could fall to $45,000 or rise to $55,000. Your premium may fall to $25.00 per month of rise to $40.00 per month. It is variable.

Common Denominator


Nevertheless, all three forms of whole life have things in common. They pay a death benefit when you die just like term insurance does. In most cases, this benefit is free from income tax. They build some form of cash value. They are permanent; they stay in force until the day you die (assuming the premium is paid). They offer tax-free cash buildup. They charge interest for money you borrow from the cash value that has accumulated. Though the premium may be level, the cash value inside the policy to pay for the death benefit may increase each year as you get older.

Depending on your age and needs, you should know how getting term vs. whole life insurance will affect you. If you are young, it is to your benefit to purchase some form of whole life. If you are older and need a death benefit, your cheapest form will be term but that will increase on a year-to-year basis. And depending on your health, you may not qualify for any type of insurance at all, term or whole life.

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