Term and whole life insurance are the two main types of life insurance. Whole life insurance is also known as permanent life insurance, and it includes numerous subcategories such as classic whole life, universal life, variable life, and variable universal life. According to the American Council of Life Insurers, 4.0 million individual life insurance contracts were purchased in 2018, with 5.9 million being whole life.
Term vs. Whole Life Insurance
What Is Term Life Insurance?
Term life insurance is the most basic type of life insurance. It only pays out if the policyholder dies during the policy’s term, which typically ranges from one to 30 years. Most term policies do not provide any extra benefits. Term life insurance plans are classified into two types: level term and decreasing term.
“Level term” insurance refers to the death benefit remaining constant throughout the policy’s duration.
“Decreasing term” means that the death benefit decreases throughout the duration of the policy’s term, usually in one-year increments.
Whole Life/Permanent Insurance
Whole life or permanent insurance gives out a death benefit whenever you die—even if you live to be 100 years old! Traditional whole life, universal life, and variable universal life are the three basic types of whole life or permanent life insurance, with variations within each type.
In the case of classic whole life insurance, both the death benefit and the premium are intended to remain constant (level) during the policy’s term. The cost per $1,000 of benefit rises as the insured individual ages, and it obviously skyrockets when the insured reaches the age of 80 and beyond. The insurance firm may charge an annual premium rise, but it would make it exceedingly difficult for most people to buy life insurance at advanced ages. So the corporation maintains the premium level by collecting a premium that is higher than what is required to pay claims in the early years, investing that money, and then utilizing it to supplement the level premium to assist pay the cost of life insurance for older individuals.
When these “overpayments” reach a particular number, they must be made available to the policyholder as a cash value if he or she decides not to continue with the original plan, according to the legislation. The cash value is an alternative benefit, not an additional benefit, provided by the policy.
Life insurance companies created two variations on the classic whole life product in the 1970s and 1980s: universal life insurance and variable universal life insurance.