Whole Life or Term Life?
Whole life insurance offers protection for as long as you live with level premiums that will never increase. Whole life insurance also accumulates cash value that can be used for any purpose you desire by taking policy loans. However, the face amount is reduced by the balance of a policy loan if death occurs with an outstanding loan. So if you borrowed $5,000 and didn’t repay it, that amount plus any unpaid interest would be deducted from the payout when you passed.
Term life insurance provides protection for a limited number of years. Term periods can be 10, 15, 20, or 30 years. At the end of the initial term the policy will expire and can be renewed on an annual basis, but the cost is very expensive especially at older ages. Your health may also limit your ability to obtain coverage.
Both term insurance and permanent insurance use the same life expectancy tables for calculating the cost of insurance. However, the premium costs for term insurance are substantially lower than those for permanent whole life insurance.
The reason the costs are substantially lower is that term policies are likely to expire without paying out, while permanent whole life policies must always pay out if all premiums are paid. You will most likely outlive a term policy. Insurance industry studies indicate that the probability of filing a death benefit claim under a term insurance policy is as low as 3%. The other factor contributing to higher cost for whole life insurance is the cash component that is part of whole life plans. To have cash value available the premium must be raised beyond the basic cost of providing the death benefit alone. So a whole life premium is paying for a death benefit and funding a savings account from which you can borrow or surrender and receive any available cash that has accumulated.
If the purpose for your life insurance purchase is to cover the cost of your funeral and other final expenses, and you want that ability guaranteed, than a whole life policy may be more suitable for you. If you have savings that will cover your final expenses and need life insurance to replace the income you would have produced over the next 10 to 20 years only, then a term policy may be more suitable.
Combining Term and Whole Life
There are whole life permanent plans that offer term life riders. You may select a $25,000 whole life policy with a $100,000 term rider that will expire after 20 years. When the term rider expires the whole life portion will remain in place. If death occurs while the term rider is active the policy will pay out both the whole life benefit and the term benefit. If the term rider has expired the policy will pay the whole life benefit only.
Permanent Plans without Cash Value
Guaranteed Universal Life plans can provide lifetime coverage with level premiums at lower cost than traditional whole life plans. The lower cost is accomplished by minimizing the cash value requirement. The result is lifetime coverage at fixed rates with little cash value available from which to borrow. If you don’t need to save money in a life insurance policy and prefer lifetime coverage a Guaranteed Universal Life plan is a great alternative to traditional whole life.
Because final expense whole life policies usually have face amounts between $5,000 and $25,000 they represent a smaller risk for insurance carriers. The underwriting on these policies is much more forgiving than term life policies which generally start at $25,000 of coverage. Clients that have experienced medical events such as heart attack, stroke or cancer can easily qualify for a final expense whole life policy without an exam. These health issues will almost always require an exam for a term policy and dramatically increase the cost.