Life insurance products offer financial security to families when the insured dies. However, many people do not understand the differences in the kind of protection that they can get from the many types of insurance products in the market. Traditionally, you would choose from a whole life insurance product and a term life insurance product when you want to secure your family against your untimely demise.
A whole life insurance product provides a longer coverage (for your entire lifetime or until age 100). There are still those who opt for term life insurance products that only give coverage for a fixed period or until a particular age. This type of life insurance products, however, can be disadvantageous to the insured when he lives beyond the termination of his term life insurance policy.
Coverage and Payment
A whole life insurance policy becomes effective (in force) when the application is approved by the underwriter, and the initial payment is paid by the insured. The payment for coverage is called a premium. The policy remains in force for as long as the premiums are paid. If a policy owner does not pay the premium on time (sometimes within a grace period), the insurance is terminated.
Whole life insurance products have stricter requirements than term life products. The insurance companies take up more risk when they cover people with whole life products. Applicants for life insurance are assessed on risk indicators such as income, health, and lifestyle. Each company would have their underwriting standards and could rate the risk factors differently. The higher the risk that they see based on their assessment, the high the premiums are. Term life insurance products have more lenient underwriting guidelines because of the shorter period of coverage.
The longer period of coverage of whole life insurance products makes their premiums higher than term life products. It is because the company has to assume the risk for a longer period. The coverage for whole life products would extend to old age when the insured moves on to being a senior citizen who is more prone to getting ill or injured and at greater risk of dying.
There are several key advantages that you get from whole life insurance. Aside from the death benefit (face amount), there is the living benefit (cash value). It is the value that is accumulated in the policy over time until it equals the face amount at the end of the coverage period. With whole life policies, the end of the coverage period is the death of the insured or when he reaches age 100. In this case, the cash value is disbursed as the death benefit.
The cash value becomes a living benefit in the form of loanable funds and endowment payouts in some whole life products. Loaning against the cash value of your life insurance policy is easier and more convenient. There also is no fixed repayment amounts and period to worry. The amount of your loan plus a minimal interest is deducted from the death benefit in case you pass away before the loan is paid.
If you wish to terminate your whole life policy, you can collect your cash surrender value. It represents your cash value less whatever accountabilities you have such as outstanding loans and interest charges.
As term life insurance does not accumulate cash value, you cannot loan against this type of policy nor get anything if you pre-terminate your policy.
Easing the Burden for Your Family
The main benefit of whole life insurance is not for you alone. In fact, the benefit for you is mostly intangible – peace of mind. It is your family who stands to collect the death benefit on your insurance coverage. The money can be used for an inheritance, as provision for estate taxes, as clean-up funds, or for other financial needs, the family might have.
Your whole life insurance benefits should be able to sustain the life of your family even when you are no longer alive to provide for their financial needs. The premiums that you are paying towards your coverage should not be viewed as unnecessary spending. It’s saving for your family’s future. Unlike having to regularly put money into your savings account and waiting a long time to achieve your savings goals, you are automatically creating a fund for your family in the amount that you intend to provide to them with your whole life insurance coverage. Your beneficiaries will get the full face value of your insurance policy even if you pass away after paying your first premium.