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Term vs whole life insurance

By Mike Heuer

Many people wonder what the difference is when it comes to term vs whole life insurance. While each provide coverage in case the person whose life is insured dies, there are significant differences between the two, not the least of which is their relative cost.

Most people in the United States buy whole life insurance plans, which grow cash value over the life of the contract while paying a death benefit when the named insured dies or turns age 100, which is considered to be a lifetime by insurers. The policies mature when their cash value is equal to the death benefit to be paid, and that makes whole life insurance plans costly. Another reason they can cost a great deal is the fact that during the first three years a whole life insurance plan is in effect, all premiums paid are used to pay commissions, fees and other costs up front, so they do not start to grow cash value until about the fourth year they are in force.

By contrast, a term life insurance plan is in effect for a set number of years, usually between 10 years and 30 years, and then it expires if the named insured is still alive. Premiums for term life plans are level and do not change throughout the period of time the contracts are in place. But premiums for whole life insurance can rise over time if the need to growing cash value also rises.

Another significant difference between term life insurance vs whole life insurance is the fact term life insurance plans to not require a medical exam to purchase. Studies show as few as 1 percent of term life insurance plans result in a death benefit being paid, and insurers base premiums on the age, general health, use of tobacco products and mortality tables, which tell insurers the chances someone might die during the period of time for which a term life insurance plan is in effect.

But when buying a whole life insurance plan, insurers will require a medical exam performed by an insurer-approved doctor, investigation into family health history and other invasive procedures than greatly complicate the underwriting and buying procedure. That means it can take a great deal of time to buy a whole life insurance plan whereas buying a term life insurance plan is relatively fast, simple to do and can be done via the Internet or over the phone.

On average, term life insurance plans cost much less than whole life insurance by as much as 10 times of more. A $250,000 term life insurance plan in effect for 30 years can cost as little as $15 per month, making it a very affordable way to protect a home mortgage or other financial interests. But a whole life insurance plan might cost as much as $175 per month for the same level of coverage.

Because term life plans are so much more affordable than their whole life counterparts, many investment advisors suggest purchasing a term life insurance plan and investing the difference in monthly premiums when compared to what would be spent on a whole life plan.