Whole life insurance is the oldest form a life insurance, while the term life insurance is a newer creation. Term insurance is not intended as a way of accumulating assets. It is instead a way of protecting the beneficiary financially if the policy purchaser dies. Term life insurance is therefore limited to a specific term, such as from the purchase date and until the insured individual reaches an age of 65 years. The money will only be paid out to the beneficiary if the insured individual dies before reaching this age. A term life insurance is a comparatively inexpensive way of protecting a spouse or depending on children from financial hardship after the death of a spouse or parent. Since the insurance companies know that most people will still be alive long after the term insurance has expired, they can offer term life insurance at a comparatively low price.
Whole life insurance is not limited in time like a term insurance. A whole life insurance will have a guaranteed death benefit that will be paid out when the insured individual dies. Whole life insurance is typically connected to a guaranteed cash value and the annual cost is predetermined. A whole life insurance will usually offer a lower gain rate than other forms of investments, but it is still popular since it is a low-risk investment and the cash value will be stated in the whole life insurance policy. Whole life insurance can be your only option if you are older than 60 years, since it is common for insurance companies to refuse selling term insurance to individuals older than 60 or 65, or set the premiums extremely high for older individuals. You should always be careful when you purchase whole life insurance and compare offers from several insurance companies. It is not uncommon for insurance companies to charge you higher fees and commissions for this type of insurance that what you would pay if you invested your money somewhere else and purchased a term insurance. It can also be hard to tell how much of your payments that will be investments and how much that will be premiums for the insurance part of the whole life insurance.
The most common type of term insurance is the so called “Level Term Life Insurance”. This is a renewable term insurance where the size of the premium is predetermined for a decided amount of years. Most types of level term insurance will have a predetermined premium for 10, 15, 20 or 30 years. You will typically pay your level term insurance at roughly same date every year and you will pay the same amount of money each year. If you purchase a 30 year level term insurance you will therefore usually pay a larger premium each year than with a 10 year level term insurance.
If you do not wish to purchase a level term insurance, you can instead go for an annual term life insurance. This type of life insurance has a one-year long term, which means that the insurance covers only one year. If the term ends on December 31st and the insured die on January 1st the following year without having renewed the insurance, no money will be paid out from the insurance company. This type of life insurance is rather uncommon since a healthy person is unlikely to die within a year and an unhealthy person will not be allowed to purchase life insurance in the first place. A modified variant of the annual term life insurance is the annual renewable term insurance (ART). This type of life insurance is more common since you will be allowed to continue your insurance policy each year for a predetermined amount of years. You can, for instance, be allowed to renew your insurance policy once a year during the next 10 years or until you reach un age of 75 years of age, regardless of your health. The annual renewable term life insurance is, therefore, a bit more expensive than the annual term life insurance since the involved risk is higher for the insurance company.
In order to calculate the premium for term insurance, the insurance companies use statistic material and try to determine how likely it is that they will have to pay out any money to the beneficiary of the term insurance policy. According to one recent study, roughly 1 percent of the sold term insurance policies will pay out a benefit. This is why term insurance is cheaper than many other forms of insurance, such as medical insurance which is much more frequently used and therefore more risky for the insurance companies than term insurance. A whole life insurance will naturally be more expensive since this type of insurance policy pay out money regardless of how old the insured individual is when he or she dies. This type of permanent coverage can also offer the purchaser considerable tax advantages, e.g. tax-deferred growth. It is also common for the death benefit – the amount of money that is paid out when the insured individual dies – to be tax-free. You should, however, remember that you will be required to pay tax on any growth if you cancel your insurance policy in advance.
If you would like to purchase a permanent whole life insurance policy but are unable to afford the high premiums, you should find an insurance company that offer you conversion privileges when you purchase term insurance. If you have conversion privileges, you will be allowed to covert your term insurance into a permanent insurance during a certain period of years. Within the predetermined timeframe you can, therefore, purchase permanent insurance regardless of your health by simply converting your old term insurance into a permanent one. Purchasing term insurance with conversion privileges can, for instance, be a good idea for a young person with a modest income. He or she can purchase affordable term insurance while still young and healthy, and later convert the term insurance into permanent insurance when the income has increased.