When you consider the lots of life insurance, you need to understand the key differences. Whole and Term Life are the principal types of life insurance. Each individual is different as so are their needs, an ideal policy will adapt to your life goals.
Term Life Insurance
Is the simplest and most affordable type of insurance. Premiums are lower than a whole life policy and are designed to end after 5 to 30 years. The only value is the guaranteed death benefit from the policy, renewal cost rises after the policy expires
A term policy design is to cover a specific financial concern with an endpoint, such as a mortgage, children’s education, etc.
A level premium is set for a specific period, which must be paid monthly. If the policy owner dies within the term, the beneficiary receives the death benefit. Term life builds no cash value (that’s why is less expensive than a whole life policy) so when the policy expires it also does the payout.
The insurance company determines your premium by your age, health, pre-existing conditions, and life expectancy; a medical exam might be required depending on the policy chosen.
Term life insurance has some riders that can complement and enhance the policy value, for instance:
Convertible term
It allows you to convert your term policy into a permanent policy; the major benefit of convertible insurance is you won’t need to submit to a medical exam, and it covers developed health conditions during the term policy’s life.
Mortgage term
Also called decreasing term, is the opposite of an increasing term because the death benefit reduces over time -you can see more on our article about Mortgage vs Term Insurance.
Living Benefits
Another benefit Term Life provides (just as WL and UL policy) is living benefits, also called accelerated benefits. This is a policy rider that covers you while you’re still alive.
They can be built into the policy or purchased for an extra amount and may require you to qualify. Shouldn’t be confused with Long Term Care rider that can come as a separate policy.
This rider provides access to a percentage of the Death Benefit, given certain conditions are met, to the policyholder, in case of chronic illness, critical illness, or terminal illness.
Medical costs increase with age and a health policy could not cover all the costs needed. A living benefits rider would allow you to keep your savings and your current lifestyle in case any of those circumstances would occur.
Depending on the condition and severity of the disease; the death benefit payout would range from 25% to 100% of the death benefit.
As with any policy, the insurer has the option to choose how the death benefit will be a payout to the beneficiaries. Whether as a lump sum or periodic payments, depending on the policy. A policy may also limit the total amount of benefits paid or require a minimum payout.
Chronic illness.
The policyholder becomes incapacitated or disabled for an extended period; being unable to perform, without assistance, at least two of the six activities of daily living:
Eating: Able to feed oneself
Bathing: Able to bath/shower, brush teeth, and groom
Getting Dressed: Able to dress and undress
Mobility: Able to sit, stand, and walk
Continence: Able to control bladder and bowel functions
Toileting: Able to get to and from the toilet and clean oneself
Critical Illness
The policyholder is diagnosed with a major condition or suffers significant injuries, such as cancer, heart attack, or stroke etc...
Terminal illness
The policyholder is diagnosed with a terminal illness and told by a physician they have less than 12 months to live.
Term life is ideal if you have a specific debt that has a termination date; given the term policy doesn’t build cash value, you can apply for a larger Death Benefit for a lower premium.
Consult with our agents about what is the best choice for you.
Whole Life Insurance
Permanent life insurance designed to last until the insured is 100 years old or passes away. Whichever comes first.
Unlike term life insurance permanent life insurance has a cash value. A fixed premium is set depending on: your age, health, and pre-existing conditions; at the time of the signature of the policy.
The premiums are higher but easier to qualify as you get older. Depending on the provider, you may don't need a medical exam but only to answer a few health questions. This is a great option if you have health issues.
If you die before the policy maturity date, the death benefit will pay in full to your beneficiary. Which could be your family, a friend, a company, charity, or your state tax. Less the amount of cash value you borrowed against; in the case you did.
If you go for an acceleration rider the premiums are higher for a determined period. Right after that, you can access the cash value in a single or a monthly withdrawal.
If you have dependents with special needs, this is a great option for you. You can also use it as an estate-planning tool or a business succession planning.
You have access to the cash value in the early years, with a few limitations and fees; but better interest rates than a traditional bank. You can borrow against your cash value for a house loan, college fees, medical bills, or any unexpected debts.
Back in 1982, before TEFRA federal law. Whole life policies were often used as an investment option. Even in today's world, whole life policies are a great complement to your investment portfolio.
If you’re still unsure, Whole Life policies also offer the same living benefits as a Term Life policy does; additionally, they offer a Term Rider which will effectively turn your policy into a hybrid, giving you more advantages for a lower price.
How does a Term Life Insurance rider work
Term riders were created by the insurance industry to work around the cost problem associated with permanent life insurance.
Since a Whole Life builds cash value it earns interests each year -in some cases, it can earn dividends depending on the insurer company. Such benefits come at a cost.
With a term rider, you can have a permanent insurance base, with an extra layer of additional coverage during the time of greatest need.
Over-insurance can also be a problem; you might have more financial obligations earlier in life, but after they’re gone you won’t need as much coverage as you did before. Having a term rider can give you the flexibility to plan according to your evolving needs in life and, save you in your premiums cost; also you can either increase, reduce or eliminate the rider when no longer need it.
A typical issue young families face when it comes to life insurance is that the time where they need coverage the most coincides with the time of their greatest financial limitations. After all, in those early years, you haven’t build a significant financial security blanket for yourself and your loved ones.
Still, you can purchase a whole life insurance policy for a lower amount and complement it with a term rider; as with a term life policy you can lock the cost of your premiums, so the sooner you apply the better.
If you still think you might need more coverage you can increase the amount of your term rider to make up the difference. Some term riders come with an automatic renewal clause and might increment the renewal cost over the years, but you won’t need to requalify based on your health condition.
You may opt for a term rider if you need to cover a large mortgage on your home or even a large student loan balance.
But, just as with a Term Life policy; after the term, coverage ends and the cost of your premiums will rise to become unaffordable in some cases.
There are many creative and flexible options a life insurance policy can offer you. But it all depends on your life stage, goals, and personal needs.
Everyone's necessities are unique and different. Contact us to guide you through the best policy for you, and your loved ones.