Explanation of Different Life Insurance Policies

by Contributing Writer

Overview

There are basically two types of life insurance: term and permanent. Both types pay out an amount upon the death of the insured. Whole life is a permanent policy and term only lasts a set period of time. Whole life also has an investment component.
Term Life Insurance

A term life policy pays a benefit only if a death occurs during a set period of time -- the term of the policy, usually one to 30 years. Policy holders pay the same premium over the course of the term, and the policy pays a specified value if the insured person dies within the term of the policy. Once the term is over, the policy has no value. As a person ages, the cost of renewing a term life policy increases.

Whole Life Insurance

With whole life insurance the benefit is paid whenever you die because you continue to pay for it until you die. Whole life combines a term benefit and an investment component. In traditional whole life, both the death benefit and the premium stay constant over the course of the policy.
The Investment Aspect of Whole Life Insurance

Payments made to a whole life policy accrue into an investment that can be borrowed against or cashed out and the policy canceled.
Considerations of Term Life

Term life is relatively inexpensive and straightforward. However, if the term expires before you do then you've got no investment built up.
Considerations of Whole Life

A whole life policy is more expensive because the pay-out is certain. There is peace of mind knowing that. However, you might be able to get a better return on investment by investing your own money over the course of your life.

Overview