Life insurance policies are designed to pay benefits (the amount of the policy) to the beneficiary upon the death of the policyholder. There are different types of life insurance policies available, and each type has its own advantages and disadvantages. To help with your decision, the following information will explain the difference between the two most common types of life insurance and the advantages and disadvantages of each.
Whole Life Insurance
Whole life insurance is a permanent type of life insurance, meaning there is no limited length of time for which the policy is in effect, so it is designed to provide insurance for your entire life. Typically, a whole life policy is taken out at a young age, because over time, the policy appreciates in value.
The face value of the policy means what the policy is worth over a specified period of time. For example, if the face value of policy is valued at $100,000 for a period of 100 years, if death does not occur 100 years after buying the policy, you will get the full cash value of $100,000 should you decide to cash the policy in. As you pay into a whole life policy, the premium will gradually increase with age, but the premium cost will stay the same throughout your life.
Advantages and Disadvantages of Whole Life Insurance
One of the best advantages of a whole life insurance policy is that you can borrow against the policy. Other advantages and disadvantages include:
- The cash value accumulates over time
- The premium will never increase
- The value accumulates slowly during the first few years
- Policy loans will decrease the cash value and the death benefit of the policy
- More expensive than a term life insurance policy
Term Life Insurance
Term life insurance is designed to only cover a person for a specified period of time (term). This type of policy is typically issued as a 10, 20 or 30-year policy. The shorter-term policies are the least expensive. The premium is typically locked in for the full length of the policy term. If you are still alive after the term of the policy, the policy lapse and you will no longer be insured, and you will not be entitled to a cash value of the policy. However, many insurance companies will give you the opportunity to keep the policy or take out a new policy, but the premium is no longer a fixed price, and in some situations, the cost will increase yearly.
Advantages and Disadvantages of Term Life Insurance
The primary disadvantage with a term life policy is that if the policy lapses you will typically lose all of the money you have paid into the policy.
- Much more affordable than a whole life policy
- There is typically no medical exam required
- Does not build a cash value that you can borrow against
- The premium may increase with age
If you are unsure which type best suits your needs, it is essential to talk with your Jack Brier insurance provider about your options before making your decision. Keep in mind that the early in life you purchase a life insurance policy, the greater the value will be should you ever need to borrow against your policy.