What is Term Life Insurance?
Learn the Difference Between Term and Whole Life Insurance
Insurance client May Smith is unhappy and is blaming her company for a misunderstanding of her policy. She has a term policy, and at age 65, as she is about to lose her group life insurance on the job, she is not particularly happy to learn that she needs to replace her private insurance as well.
Client Susan Carey, on the other hand has been breathing sighs of relief—although she is sad—for well over a month. Her husband died in a freak accident, but he had a term policy that will give her and the two children about $500,000 in benefits that—with some advice and investment help—will go a long way in helping her raise the family on her own without losing the house or compromising their standard of living.
The two scenarios are fiction, but effectively illustrate the fact that Term Insurance is the correct choice for some people, but not for others. Ms May, in our first example, may have been quite satisfied with her Term policy for many years and simply forgot about the fact that Term is not forever. At any point during the duration of the Term, she could have converted the policy to Whole life (providing the company offered it) and would not be trying to figure out how to pay a life insurance premium on her retirement income. For her, Term may have initially been suitable, but later in life, she should have been made aware of other options.
Our second fictitious client, Susan, was still in the middle of raising a family when her husband met his untimely demise. With all of the bills associated with managing a home and family, the Clarey’s might have found it challenging to purchase whole life of the same face value as the Term. While it is rare that a term policy has to pay off, it does happen, and when it does, the benefit can mean the difference between security and utter poverty for the beneficiary. As the family grows and the need for such a high face value becomes less, the Clarey’s can convert incremental amounts of the Term policy to a whole life policy.
Difference Between Term and Whole Life Insurance
There are two primary differences between Term Life Insurance and Whole Life Insurance. The most significant is that Term is exactly what it sounds like—insurance for a period of time. Whole life is insurance that lasts until the day you die, and if you purchase one with a level premium, you will have the same payment from the time you purchase it until the time you die. While most companies allow you to convert Term to decreasing term or annual renewing term at the end of the initial time period, these conversion options are not acceptable to most clients. The annual renewable will result in premiums that no one would want to pay even if he could afford them.
The second major difference is in the eventual value. Whole life policies build cash value—albeit slowly—while a Term policy has no cash value. This cash value can be a significant asset in retirement years. And of course, having a whole life policy from the start prevents you from having to worry about replacing the Term later. Both policies can be purchased with a wide variety of riders.
What do you need? It’s really a matter of fitting the policy to the needs of you and your family. And the best way to do that is to work with a qualified, licensed agent who will take the time to analyze your situation and customize a life insurance program just for you.