To choose between Term Life Insurance and Whole Life Insurance, rate them on the comparison parameters by entering scores (+ve or -ve) in the comparison tool.
The total points are automatically shown in the top row. This should help you decide.
An original form of life insurance and considered to be pure insurance protection in which death benefit would be paid by the insurance company if the insured died during the term, while no benefit is paid on maturity of the term.
A term life Insurance plan with an unspecified period, under which the death benefits are paid on death whenever it may occur.
Payment:
Death benefits are paid only on the death of the insured during the policy term.
Death benefits paid on death (in full) and also (in partial) if the insured reaches an age of 100 yrs or any other agreed upon age by the insurer for ex. 75 yrs or 80 yrs.
Premium:
Cheapest form of insurance, very low premium as policy may expire without paying out.
Higher premium as whole life insurance plans must always pay out eventually.
Popularity:
Cheapest form of insurance so popular
Whole life insurance is now non-existent.
Components:
Insurance only
Insurance + Plus investment
If alive at the end of the policy/coverage term:
No payout
Guaranteed payout
Factors to consider:
Benefit amount, Premium, Coverage term
Payout, Premium, Policy term, Internal Rate of Return (Gain due to investment minus any commission or fees)
Better suited for:
Common terms are 10,15, 20 or 30 yrs
Whole Life
The main difference between term life insurance and whole life is that Term Life is "pure insurance" whereas Whole Life is "insurance plus investment".
A term life insurance policy has 3 main components - face amount (protection or death benefit), premium to be paid (cost to the insured), and length of coverage (term). The policy expires at the end of the term. If the insured person dies during the term of the policy, the beneficiary is paid the benefit (face) amount. If the insured person is alive after the term (duration) of the policy, no benefit is paid and the policy expires.
On the other hand, whole life insurance is a form of permanent life insurance, which means that in addition to insurance, the policy also has a savings component. This means that a part of the premiums paid by the insured person goes towards insurance, while a part of it is invested and builds a "cash value". If the insured lives beyond the policy expiration, the cash value is paid out to the insured. The cash value can also be used to borrow money against. The cash value is invested (in bonds and money-market instruments or stocks), and therefore there is a gain. This gain is tax-deferred if the policy is cashed in during the life of the insured. (If the insured person dies, the proceeds are usually tax-free to the beneficiary.)
Whole life insurance policies are a lot more expensive than term policies. Moreover, often there are hidden costs in whole life insurance policies:
high fees and commissions that can lop off as much as 3 percentage points from the annual return.
up-front (but hidden) commissions that are typically 100% of the first year's premium. it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment.
[edit] How to choose between a whole life or a term life insurance policy
Some factors to consider when choosing between a term life or whole life insurance policy:
Term life insurance is a lot cheaper than whole life insurance, and therefore it makes it much more affordable. The money saved can be invested in other investment options.
If you are over 65 or 50, it may be a lot more difficult to get a term life insurance policy in the US.
The choice between term and whole life is typically clearer in certain situations. If you need insurance for a term of less than 10 years, term life insurance works out to be clearly more cost effective. For a term over 20 years, whole life insurance tends to be more cost effective.
