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What is the difference between whole life and term life insurance policies?

My husband wants to take out an insurance policy on himself for our family due to the fact that he is the primary source of income. We have been researching life insurance policies..what is the difference between whole and term life? My husband is 8 years older than me so he wants to make sure that myself and our children are taken care of in the event of his death.

Public Comments

1. Term life insurance is just like car insurance. If you have a claim the insurance company pays and if you don't your money is gone. The life insurance is just there in case you die. Whole life is more expensive and has a savings portion called cash value. It is NOT an investment and should not be used for that purpose. Term is cheap and whole life is not. You might want to post more questions if you have them.
2. Term Life Insurance provides death benefit protection for a specified period of time (usually 5, 10 or 20 years). If the policyholder dies within that specified period the beneficiary receives the death benefit. If the insured does not die neither the insured nor the beneficiary receive any thing. Term life insurance is a good choice if you are young, can't afford the much-higher costs of whole life insurance, and have financial obligations that will disappear in time, such as a car loan, a mortgage or insuring that funds will be available for a child's college education. Whole Life (Ordinary Life) Insurance provides protection for your entire life. That is why it is often referred to as permanent insurance. An ordinary life insurance policy is a combination of a term insurance policy and a “savings account.” The premiums are much higher than for term insurance, and they are usually stretched out over a longer period of time. The policy owner pays a level premium, which is usually higher in the early years, and excess amounts are used to fund the savings account (also known as the cash value). Ordinary life insurance allows the policy owner to choose one of the following options, even if the insured doesn't die. 1 Receive some of the premium back in the form of a low-cost policy loan 2 Surrender the policy for cash 3 Receive a reduced life insurance benefit at death 4 Continue the current life insurance benefit for a reduced time period Most will be adamant that term insurance is the right solution for everybody and there is some truth to that but whole life should not be totally dismissed. I have a small whole life policy that I took out in 1974 that is now adding to its cash value at a greater rate than the annual premium.
3. Cash-value which can be accessed tax-free through loans. If you over-fund the policy, you can get a great return long-term!! But someone who wants to sell you a mutual funds might not tell you this fact. Term is for a specific period of time, while it is a good policy, it can not be held for more than 20 or 30 years. The reason, it becomes too expensive!! If you become uninsurable, you better hope you got a life insurance policy that allows you to convert it to a permanent policy without going through underwriting. Otherwise, you are screwed. Because of this fact, it is always advisable to have both types of policies with whole/universal life being purchased first. God help you if after your term policy is issued you become uninsurable and cannot convert it into a permanent policy without underwriting (I repeat twice because this is a very important decision) and you will be cursing the insurance agent that sold you that policy without telling you. Dave Ramsey, Primerica, and all those other "Buy Term & Invest the Rest" people will possibly have screwed you out of the financial security your family will definitely need!!! Sometimes I wish people would consider this Option before they listen to this investment strategy. Sorry about going off on a tangent. But it is good info!! Finally, permanent life insurance allows you to access the cash-value tax-free. When your children get older and need to go to college, this money could be accessed for this purpose!! You must over-fund it in the beginning to achieve this though.
4. First: Congratulations for looking and planning to take care of this for yourselves. Let's discuss some various types of life insurance. Term- this is for a specific period only. Most companies offer 10, 15, 20, and some 30 and even 40 year term policies. There is no cash value accumulation within a term policy and it is basically renting your insurance for a specified period of time. It has its place, but the one bad feature of it is that you only win if you die. Most beneficiaries actually appreciate if the policy is in force at your death :-) and only about 1-2% of all term policies ever pay off because most folks drop it as they get older, simply because the costs become exorbitant. Second: there is permanent insurance. This is insurance that will cover you for your lifetime, no matter how long. There are various types of permanent insurance. A lot of folks only know of an older one called Whole Life. This is an insurance in which there is cash value growth within the policy. The premiums are fixed in this type of policy. The basic idea is that you make premium payments and what is above the necessary to insure you goes into the General Accounts of the insurance company and they usually guarantee you about 3-5% on this. However there is almost never any cash accumulation over the first five years and what they give you barely, if it even does, keeps up with inflation. Also as you age, the cash accumulation can be used by the company to pay for policy charges so these often lapse or the person winds up at retirement with little if anything in the policy. There's another insurance called Universal Life which is similar in many ways to the whole life, but here the premium payments are flexible, but again any cash value accumulation is put into the General Accounts of the insurance company and guaranteed at about 2-5%. Third: Because both of these types of insurance often didn't provide sufficient cash value accumulation the insurance companies came out with a product, and it is a very very good one for a lot of folks. It's called a Variable Universal Life policy. Here, the cash value accumulates in Sub Accounts (which are owned by the insured and NOT the insurance company). These accounts are out in the market and get market rates of return. Depending on the portfolios that you are in, these can average anywhere from 8 - 12% over time. They can also take a hit over the shorter term as you can see in the market now. These policies not only provide life long insurance for you, but the cash value in the account may be accessed tax free (as it may in the other cash value insurance) and if structured correctly, this can add much money to your retirement or even before so you may enjoy it even while you're alive (as well as having the death benefit if something happens to you). About eight years or so ago, the insurance companies also created Indexed Universal Life. In these policies, the cash value accumulation is a result of being compared to some index, usually the S & P 500 or sometimes a combination of the S & P and international indices like the Sang Heng over the year. A lot of these policies average about 8% over time. They often have a cap and a floor and they are often very attractive to folks who like guarantees. You're going to hear a lot of "sound bites" here. A lot of simply "buy term, invest the difference". "All cash value insurance is evil" etc. These are usually from folks who aren't even licensed to discuss the variable forms of insurance in front of someone. They also never mention the potential tax benefits of a permanent policy vs. the term buy the difference strategy. I'm dually licensed, both with an insurance license as well as a security license (NO, this is not a solicitation for business, I'm simply attempting to answer your question in as concise and correct as possible in front of a computer where I can't illustrate or draw things for you.) I suggest that you might like to have your library request "The New Life Insurance Investment Advisor: Achieving Financial Security for You" by Ben Baldwin. It's a bit dry, but you can see for yourself if what I've said is accurate. As an aside, remember if you get your life insurance from your employer, often it's only about 2x your salary and it usually ends when your employment does. Please, if you speak to any agent local to you, make sure he/she is dually licensed so you can get the full story and not just the part of it that the singly licensed person wants to discuss because it's the only way they can sell the only thing they have available. Does this mean I think term is bad? Absolutely not. I often recommend it to folks who have a need for it, but usually it's a convertible policy that can be moved to a permanent one as their situation improves. However, term is NOT the be-all and end-all and it often increases in cost to a point where you wind up having to drop it. Most families I know prefer that t
5. Term life insurance offers you coverage for a certain term or period of time. Premiums remain steady during this time and are usually low cost. If you outlive the term, there are no gains for you, and no money is refunded to you (unless you opt for a Return of Premium term life policy) on premiums that have been paid. If you die during that period, death benefits will be paid to your beneficiaries. On the other hand whole life insurance covers you for your entire life. Whole life insurance also acts as an investment and will build cash value over the years. These can be utilized by the owner whenever the need arises. There are no such options available in term life insurance. However, these options make whole life policies expensive, and sometimes unaffordable for the average American. For your husband I would recommend that you consider a term life policy because it offers you the same amount of death benefits as a whole life policy, but at very affordable premiums. Denise at AccuQuote Disclaimer: I work for AccuQuote and this is my personal opinion.
6. What is cash value life insurance? It is a term policy to age 100 that contains a savings vehicle in it. Cash value comes in many forms, such as whole life, universal life, variable life, or a mixture of those words together such as variable universal life or universal whole life, etc. The advantages of having cash value life insurance is that you are protected until age 100, you can use the cash value anytime for any use such as paying your premiums, and interest on your cash value is tax-deferred. The disadvantages of having cash value life insurance is that you are paying lots of premiums for low amount of coverage, no cash value is accumulated during first two years of the policy, rate of return is very low, and if you use any of the cash value, you will owe monthly interest on it. This interest does not go back into the cash value, but rather kept by the insurance company because the money you taken out of the cash value is treated as a loan. In many policies, if you were to die, your beneficiary will receive the face amount and all cash value will be kept by the insurance company. Keep in mind, if you use any of the cash value and you did not pay it back, this amount will be deducted from face amount upon your death. Another disadvantage of cash value life insurance is that they are riddle with insurance fees. The most noticeable fee is the surrender charge. This is clearly stated in the policy of how much cash value you will get if you surrender the policy. Then there are fees you don't see such as administrative fees, policy fees, maintenance fees, and all these other operating fees. If your cash value life insurance is a variable policy, that means your cash value is invested in the stock market. Investments too have their own operating fees. If you combine investments and life insurance together, now you have so many different fees that eats away the returns on your investments. You are probably asking, why would anyone buy this kind of life insurance? First reason is that many people do not understand how this policy works. Second reason is that people don't buy life insurance, they are sold on it. The agent who sells cash value life insurance does not care about you or your family. All he/she cares about is how much commissions he/she is getting paid and they going to use whatever deceptive sales tactic to make you buy it. So, what is term insurance? It is the type of insurance that provides a level death benefit for life. Just like car insurance, if you don't pay your premiums, you will lose coverage. Advantages of having term insurance are: premiums are very low during the term, you have more flexibility to invest your money in a savings vehicle (hence the phrase, "buy term and invest the difference"), and if you were to die during the term, your beneficiary will get the face amount and all your investments. Another advantage is that you can change the amount of coverage without affecting your savings and vice versa. (In cash value life policies, you are stuck with paying into both.) The disadvantage of term that while premium remain fix for certain amount of period (10, 15, 20, 25, 30, or 35 years), the premium will go up when it is time to renew. Majority of term policies provide renewable term coverage up to age 100. But there are some term policies that stop coverage after the level term expires because the insurance company wants you to convert it to whole life or universal life. Why would people buy term insurance? First, premiums are very low and remain fix during the term. In the early stages of your adult life, you probably have lots of debt to pay off such as your mortgage, you probably have kids to support, and you probably don't have much money saved for retirement. So you need lots of insurance coverage to protect the family. As you get older, your kids are all grown up, your mortgage is or almost paid off, and you better have lots of money saved for retirement. As you get older, you probably won't need life insurance or need as much coverage as you did 20 to 30 years ago. What happens when the level term expires? When the level term expires, you enter the phase of the contract called "Annual Renewable Term." That means you have the right to renew the term without having to provide proof of insurability. The premiums will go up every year or so (check the policy on how often the premiums goes up after the level term). Depending on your policy, you are usually given several options when the level term expires. (1) You may convert it to a permanent whole life policy (which I don't recommend). (2) You may exchange it to another level term (3) You may refuse to pay the premiums to cancel the policy (4) You can change the death benefit (5) You may renew the term for another 5 years until age 75, which then you may renew every year until the policy expires.