Term vs. Whole Life Insurance

When choosing a life insurance policy in South Carolina, buyers may be intimidated by the decision of whether to purchase term or whole life insurance. Understanding the differences between the two, and weighing the pros and cons of each, can simplify the decision making process.


Term

Term life insurance provides coverage to the insured at a fixed rate premium for a specified period of time. Upon the expiration of the policy, the fixed rate is no longer guaranteed, and no benefit is paid out. The insured will either be required to renew the current plan, purchase further coverage under a different plan, or forfeit coverage altogether. If the death of the insured occurs before the policy expires, the beneficiary previously designated by the insurer will receive the benefit amount.

Whole

Whole life insurance, like term insurance, pays the designated beneficiary the face value of the policy upon the death of the insured. However, whole life insurance does not expire, and remains in effect for the lifetime of the insured. Whole life insurance also contains a savings element from which the insured can borrow against, or simply allow interest to accrue until the policy reaches maturity.

Breaking Down the Pros and Cons

To effectively make an informed decision between term and whole life insurance, one must weigh the benefits and disadvantages of each type of policy:


•Term life pros

•Lower cost – Term life insurance is much less expensive than whole. This is due in part to the fact that the pay out rate of term policies is low. The majority of term policies expire before the death of the insured. Term life policies are pure insurance with a face value, and do not carry any extra costs for cash value or investments.

•Temporary coverage – While it may at first appear more of an advantage to carry a life insurance policy for the extent of an entire lifetime, many find that it may only be needed for an allotted amount of time.

•Flexibility – The amount of the face value of a term life policy can be adjusted later in life. The insured is free to increase or decrease the face value of the policy as need arises.


•Term life cons

•Expiration – Unfortunately, temporary coverage of a policy can be a disadvantage in some cases. If further coverage is desired after the expiration of the policy, the insured will be required to either renew the policy or purchase a new one. While the initial premium is set for the fixed term of the policy, once the initial policy has expired, those premiums no longer hold. Premiums for term life insurance increase with age. Health is also a large determinate in the amount of a premium. If the buyer is not in good health, the premiums will be much higher.


•Whole life pros

•Tax deferred savings component – A whole life insurance policy consists of investments and savings that create a cash value of the policy. This can be borrowed against during the lifetime of the insured. The policy may even gain enough cash value that the insured can stop making premium payments on the policy.

•Lifetime fixed rate premium -- While the premium for term life insurance policies may increase with age and health, the premiums for a whole life insurance policy remain the same for the lifetime of the insured.


•Whole life cons

•Expense – Whole life is much more expensive than term life insurance.

•No flexibility – The terms of the policy cannot be altered to fit later needs. Once a whole life insurance policy has been purchased, the premiums and face value are permanent.

•No control in investments – The insurance company determines the investments and savings plans of a whole life policy. The insured has no say in how the investments of premium amounts are handled.

 

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