What Are the Differences Between a Term Life Insurance and a Whole Life Insurance?

Term life or whole life? This is the most actively discussed topic of life insurance. Some think, investment and life insurance should be separated. Hence, this group of people suggest "buy term and invest the difference". But another group of people think otherwise. They think a whole life insurance actually helps individual to build the good habits of saving.

Choosing life insurance is the matter of suitability. There is no superiority of one insurance to another. Understanding the differences between this two products shall give you a better idea of which suits you the best.

Difference in Terms of Cash Build-up

The most observant feature of a whole life insurance is the cash build-up. As you pay the premium for the policy, a portion of your premium goes to investment. The insurance company shall guarantee you on certain amount of return to your policy, depending which types of policy you are buying. There could be a portion which rely on performances of the investment and hence not guaranteed. The cash accumulated is tax deferred until it is withdrawn from the policy.

Term life insurance, on the other hand, is very simple and straight forward. There is no cash build-up in the policy. The premium paid will all be channelled into buying insurance coverage.

Difference in Terms of Premium

If you are buying a whole life insurance, you may need to pay higher premium of the same amount of coverage compare to buying a term life insurance. Premium of the whole life policy is constant for the rest of your life, while for term life, premium of tends to increase, especially upon renewal.

Difference in Terms of Period of Coverage

A whole life insurance usually covers you for life long, while a term life insurance covers you to certain numbers of years. There is normally a maturity date in the whole life policy. For the term life, there is no maturity date, only expiry date.

A whole life or a term life? It depends on your needs and budget. They have their pros and cons. If you are good in investing and have time to do so, then a term life may be what you are looking for. If not, a whole life will help you to build the habit of saving.

If you are in high tax bracket, choosing a whole life is a good choice as the cash build-up is tax deferred. Sometimes, you may also need to ask yourself, for how long would you hold on to the policy. If it is for more than 20 years, getting a whole life is better as you may get back more than what you have invested in the plan. If you do not intend to hold on that long, then you may want to consider just buying a term life insurance.

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