Whole Life vs. Term Life: The Difference between Insurance Options

whole life vs term lifeAre you in the market for a life insurance policy to cover yourself or your loved ones? Are you a broker looking to expand the range of insurances offered? Maybe you’re just starting out in the insurance business and want to get a better sense of the products being sold. Whatever your purpose, it is important you understand the critical difference between whole life and term life insurance polices. Both of them serve an immediate and important purpose in offering security and stability that will give you the opportunity to live life to it’s fullest without worrying whether your family is adequately protected in the event of a tragedy.

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Term Life Insurance

The purpose of term life insurance is to provide you with protection for you and your family for a specific period of time. The most common periods of times that term life insurance can be bought for is in 10, 15, 20, and 30 years. This particular brand of insurance provides coverage for a set rate of payments over the specified period. Once the specified period of time ends, the previous rates are no longer guaranteed and a client must either give up coverage or look to obtain more coverage with different payment structures and conditions.

Term life insurance is the original form of life insurance. It is used primarily as a way to replace the income of an individual who has passed away. Basically, if you buy term life insurance for a period of 30 years and within that time pass away, your family will receive the benefits the term offered to help them survive in your absence. Term life insurance is a pure death benefit. This means that only upon the event of your death is any amount of money paid out on the coverage.

There are two basic types of term life insurance. One is annual renewable term. This means that life insurance is provided for one year and the insurance company would pay the death benefit if the individual who purchased the insurance died within that year. Even if they died one day after the term ended, there would be no payment.

The reason for this type of insurance has to do with likelihood. Because the likelihood that a person would die in the same year that the insurance was purchased the premiums is often lower. However, annual renewable term life insurance requires proving insurability. A person with a terminal illness would not be able to purchase this insurance because they would be considered uninsurable. Another problem with this type is that if they contract a terminal disease but do not die within the year they would be unable to get any other life insurance because they would become uninsurable.

The second type of term life insurance is called level term life insurance. This is the more common form of term life and falls into the time brackets mentioned above of 10-30 years. In this form of term life insurance, premiums remain at a relative constant for the entire term. This cost is calculated based on the total of each year’s annual renewable term rates. Because the insurability quotient is higher, this type of term life policy usually includes a renewable option or extension ability.

Whole Life Insurance

Whole life insurance offers a death benefit like term life insurance, but has several differences. The first is the duration. Whole life insurance is contracted for the insured individual’s entire life. There is never a set period or term when this insurance policy ends. It’s important to remember that with this type of insurance, the insurance company takes a complete risk, which means the financial structuring of whole life insurance is completely different. If understanding the complexity of whole life insurance interests you, it’s time to move onto part 2 of Udemy’s high performance insurance broker course.

Difference In Benefits

Whole life insurance policies have what is called a living benefit and a tax-sheltered cash account that accrues money built into the policy. This means that while term life insurance offers only a product, whole life insurance utilizes the stock market and other monetary systems to create an increased income plan for the individual. They do not pay taxes on those gained earnings. Unlike term life insurance, whole life insurance offers more than just a death benefit. That money can be used in retirement or as the individual sees fit.

Additionally, the buyer of a whole life insurance policy can add riders. This means that they can work to restructure their policy with their broker as they go, and accelerated benefit riders are one type of change that can be made. This is an agreement whereby if the individual who owns the whole life policy contracts a terminal illness they can get quicker access – up to two thirds – of the whole life benefits while they are still alive. Once again, this cannot be done with term life insurance.

Differences In Premiums

Premiums are the amount you pay to the company each year for providing your insurance policy and contracting to pay benefits if you die. As mentioned, term insurance – also known as temporary life – has a fixed period of time when the premiums are level. After the fixed period of time has ended however those premium levels increase or the policy terminates.

Whole life insurance has a level premium. Because, in theory, this policy will be around indefinitely the premium is never going to increase. The best way to consider it is like a mortgage payment for your life. If you can afford that calculated first year premium, you will continue to be able to afford it.

Difference In Dividends

Term life insurance has no dividends. Whole life insurance policies, on the other hand, do. Each year those dividends – earnings on interest – are paid out. How the customer who owns the whole life policy chooses to use them is their prerogative. Very often, those dividends are put towards the yearly premium. They can also be used to accrue interest inside the policy. It works in a similar way to ownership of stock in a company. When that stock makes money those dividends (extra earnings) are paid out. When it comes to whole life insurance, the company is your life and the stock is your policy. If you’re ready to understand the dividend process on a whole life policy it’s time to get going on with How to Be a High Performance Insurance Broker: Part 3.

Understanding The Math

Buying and selling life insurance – whether term or whole life – is relatively simple. However the mathematics involved in calculating cost and risk is a variable that is important to know regardless of which side of the sale you’re on. These calculations and risk assessment numbers are the same for both types of policies.

One particularly important number for both policies is the mortality cost. This is the number that is your determined premium. It is calculated by assessing how much the company is going to pay out every year, how many clients they have, and your own age at the time of buying the policy. The mortality cost is a number that rises every year. That is because each year the batch of clients will age and the risk of them dying increases as well. So as the mortality cost goes up, the insurance company has to address the rising cost of providing sound policies.

Whole life insurance was created much later than term life insurance and it was designed to address this exact issue. The ability for the company to invest the money into stocks and bonds allows them to work with the free market like many other types of industry. This means that when a client is offered a whole life policy there is going to be discussion about the rate of return offered on the investment. Generally buyers or sellers should be hesitant to state or believe any promised rate higher than the 30-year treasury rate. This is because most insurance companies invest in bonds, and their worth is tied to that rate’s fluctuation.

Insurance is an important product in today’s fast paced world. Providing for family is a main concern of many people and that is why buying insurance becomes so important. Insurance provides a level of security that can give an individual the peace of mind they need to live their life to the fullest.

If you’ve taken the previous courses and feel ready and willing to complete the training needed to be a high performance insurance broker then go ahead and sign up for part 4 of Udemy’s insurance course. Whether you’re looking for an exciting and lucrative career as an insurance broker or just trying to get a handle on what type of life insurance is best for you, checking in with Udemy can get you started on the right path.