The two most popular types of life insurance are whole life and term life. In some cases, whole life may also be called permanent coverage. It encompasses several subcategories, which include universal, traditional, variable universal and variable. Millions of people purchase whole life or term life each year. In 2003, there was only a difference of about 1 million purchases between the two types of products. It is important to remember that life coverage sold to individuals is different than the insurance policies sold to groups.
Understanding Whole Life Insurance
Whole or permanent life coverage provides a benefit upon the death of the policyholder. There is no term limit, so a policyholder’s beneficiary would receive money whether the insured died at age 50, 80 or even 100. As mentioned previously, there are sub-types of coverage under whole life. In addition to this, each of the subcategory coverage types offer their own variations.
With traditional whole life coverage, both the premium and death benefit amount will remain the same for the policy’s duration. As the insured ages, the amount per $1,000 of coverage increases. For those who live beyond age 80, these amounts can be very high. However, insurers do not assess higher premiums in later years to keep up with these rising amounts. The premiums are higher when a person is younger. As the person ages, the premium amounts decrease. Insurers understand that people generally have less income as they age, which is why the policy is designed this way. When the money paid into the policy reaches a certain point, it must be made available to the insured as a cash value benefit. If the policyholder decides to discontinue the plan, the cash may be withdrawn.
Understanding Term Life Insurance
This is the easiest form of coverage to understand and obtain. Term life only provides a death benefit if the insured dies during the predetermined time frame. For example, a person who is 40 and purchases a 30-year policy would produce a death benefit if he or she died at age 68. However, if the individual did not obtain additional coverage and died at age 72, there would be no death benefit. Most terms vary between one and 30 years. Since the policies are simple, they do not offer any other benefits such as cash withdrawals.
With term life, there are two main forms of policies, which are decreasing term and level term. Decreasing term policies have dropping death benefits, which are usually based on one-year time increments. These last for the entire life of the policy. For level term, the death benefit remains the same throughout the policy’s term. In the past decade, the most popular type of coverage purchased has been level term. To learn more about these options, discuss concerns with an agent.