An Overview of Term and Whole Life Policies

Term Policies

Term policies are policies that are created to cover the insured for a fixed period of time. It is common, however, for term policies to be renewable, and can be renewed without a new medical examination (up to a determined age). Despite being renewable, however, the premiums will invariably be higher, as the insured is at a greater risk of mortality at an older age. It is also generally possible to convert a term policy into a different type of policy all together, so as a whole life plan.

There are three types of term policies: Level term, Decreasing term, and Increasing term. In a Level term policy, the coverage remains the same, the level of insurance does not change. If you have lessening financial obligations (for example, annual debt reduction), it is preferable to obtain a Decreasing term policy, which reduces itself each year until it reaches zero when the term is complete. Increasing term policies grow annually, but are not ordinarily preferable.

Whole Life Insurance

Unlike a term policy, whole life insurance is designed to cover the insured for the duration of their life. The cost of the premium can thus be established to remain the same as you grow older, spreading the total cost of your policy over your entire life.

Whole life insurance, sometimes referred to as "Permanent life insurance" or "Straight life insurance", has a cash value that grows with deferred taxes, so that if the policy is terminated the insured is given this sum. The insured will only pay taxes if this sum (in addition to any dividends) is greater than the total cost of the premiums that have been paid.

It is this accumulated money, coupled with the policy's death benefit and permanent coverage, that present the merits of Whole Life insurance. The cost of the premium remains the same throughout the duration of the policy, which generally ends when the insured reaches 100. At this point the premium payments are finished and the cash sum is the same as the face amount of the policy, which is then paid to the insured provided he or she is still living. The face amount of the policy is paid if the policy owner dies while under the plan. Whole life insurance is particularly applicable to families, as it allows for loans to be taken on the policy, and may pay dividends as well if the contract is a participating policy. Generally, however, whole life insurance policies are used so that the insured may have an even protection plan up to retirement, where it is often seen as more beneficial to us the money that has accumulated from the tax deferral to add onto one's retirement plan.

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