Whole life vs term life – what is the difference between term and whole life insurance?

It is easy to distinguish between term and whole life insurance. Some people have gone as far as dichotomizing the two types of life insurance to the point that two enemy camps have been formed: those of the "perms" and the "terms". The "perms" point to the longevity and the cash-value element of permanent life policies, while the 'terms' argue that term policies provide the opportunity to buy life insurance for cheap, and invest the difference in mutual funds or stocks.

There is never a uniform solution, and the "better" option is the one that best suits your needs for insurance protection. In order to make an informed decision when you start shopping around, you should be aware of the characteristics of both "term" and "perm".

Characteristics of Whole Life Insurance

• Whole life insurance is a type of permanent life insurance, and as such, provides guaranteed lifelong coverage, in force until the insured reaches age 100.
• Whole life insurance, like all other types of permanent life insurance, has a cash value element which allows for part of the premiums to accumulate on a tax-deferred basis. The cash value is considered by some financial planners excellent investment, as the policyholder can borrow the cash value, withdraw it, use it as collateral for a bank loan, or create an education fund for their children.
• A participating whole life policy offers dividends which the policyholder can receive if the insurer has had a good financial year.
• Once determined, premiums are level and are not affected by external factors, or by the health of the insured. Compared to term policies, their amount is considerably high in the early years of the policy but low in the later years.

Term Life Insurance - Characteristics

• Term life insurance is purchased for a certain period of time and is a good solution for people with short-term insurance needs.
• The cost of term life insurance is comparatively low for young applicants but it gets proportionately higher as they age.
• Unlike whole life insurance, term life does not have a cash value component and does not guarantee any living benefits; it expires without residual value, only paying if the insured dies during the policy term.

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