Term life insurance vs whole life insurance

Life insurance is offered by several insurance companies worldwide. It is insurance on the life of an individual which seeks to provide compensation to his nominees on his death. Life insurance is popular form of insurance opted for by individuals especially by those who have a dependent family so as to secure their future. Life insurance today also comes with tax saving and other benefits in addition to simply providing a life cover

This article looks at meaning of and differences between two types of life insurance – term life insurance and whole life insurance.

Definitions and explanations

Term life insurance:

Term life insurance is a life insurance policy in which the sum assured of the policy is received by the nominees in case of death of the insured individual within the specified term of the policy.

Simply put, term insurance is valid for the tenure specified in the policy document. If the tenure lapses (and is not renewed) and the insured individual is alive, the insurance cover is not payable and the policy lapses.

Example – An individual has obtained a term life insurance plan with a cover of $1,50,000 at the age of 40, with the policy term being till he attains 80 years of age. The annual premium is $250. There can be 2 scenarios in this policy:

  • The individual dies before he reaches 80 years and his nominees receive the $1,50,000
  • The individual is alive and reaches 80 years, no amount is payable under the policy and it lapses (including premium amounts that lapse as well)

Term life insurance policies offered by certain insurers permit extension of the term of the policy before it lapses, often on payment of additional higher premium.

Whole life insurance:

Whole life insurance is a life insurance policy in which the sum assured of the policy is paid to the nominees on death of the insured individual, irrespective of when the death occurs.

Simply put whole life insurance is valid for the ‘whole life’ of the individual and does not have any fixed tenure attached to it.

In the same example as above, the individual has to pay premiums throughout his life to keep the policy alive and his nominees will receive the sum assured on his death.

Whole life insurance also has a ‘cash value’, in addition to the life cover of the policy. The sum total of all premiums paid by the insured (plus an applicable return rate) is the cash value of the whole life policy. This cash value is relevant as it is the basis on which the insured can borrow from the insurer as well as the basis for the amount that he can receive on surrendering the policy. The cash value can also be utilized to offset and pay premiums at later stages of the policy.

Differences between term life insurance and whole life insurance:

The difference between term life insurance and whole life insurance has been detailed below:

1. Meaning

  • Term life insurance is a type of life insurance which provides life cover for the insured within a specified policy term i.e.: the sum assured will become payable to the nominees only if the insured passes away within this specified term.
  • Whole life insurance is a type of life insurance which provides life cover for the insured for his entire life span i.e.: the sum assured will become payable to the nominees whenever the insured passes away

2. Tenure of insurance policy

  • The tenure of a term life insurance policy is fixed and defined at commencement of policy.
  • The tenure of a whole life insurance policy is indefinite as it remains in place till the death of the insured.

3. Policy lapse

  • Term life insurance lapses on completion of the specified term.
  • Whole life insurance does not have any specific term at which point it lapses, it remains in force till the death of the insured individual and till premiums are paid.

4. Guarantee

  • Term life insurance does not have any guaranteed payout of life cover as no amount will be payable if the term is completed and the insured individual is alive.
  • Whole life insurance comes with guaranteed payout of life cover on death of the insured.

5. Premium amount

  • Term life insurance has a limited term and no guaranteed payout, thus it has a lower premium amount for the same sum assured as whole life insurance.
  • Whole life insurance has guaranteed payout of life cover as well as additional benefits related to its cash value, making it more expensive with higher premium amounts.

6. Additional benefits – cash value

  • Term life insurance is a pure life insurance as it does not offer any benefits other than term life cover.
  • Whole life insurance also offers the benefit of ‘cash value’ in addition to the life cover. Cash value is the cumulative amount of premiums paid by the insured individual. This value is the basis on which the insured can borrow from the policy, obtain surrender value and can also serve as loan collateral.

7. Surrender or cancellation of policy

  • Term life insurance can be cancelled by non-payment of premiums. On cancellation/surrender the policy will lapse and no amount will be able to the insured or his nominees.
  • Whole life insurance can also be surrendered by informing the insurer and stopping premium payments. Unlike term life insurance however, the insured individual can receive a surrender value on cancelling the policy which is based on the policy’s to date cash value.

8. Renewal

  • Certain term life insurance policies can be renewed before completion of its term, for a limited additional period by payment of additional higher premium.
  • Whole life insurance policies do not require renewal as they remain in force till the death of the insured individual.

9. Convertibility

  • Certain term life insurance policies can be converted into whole life insurance policies.
  • Whole life insurance policies cannot be converted.

10. Risk for insurer

  • Term life insurance carries higher risk of loss of premium for the insured individual as there is no guaranteed payout.
  • Whole life insurance carries lower risk as there is guaranteed payout as well as cash value for recovery of premiums in case of surrender of the policy.

Conclusion – term life insurance vs whole life insurance:

Term life insurance when compared to whole life insurance is generally a cheaper option to receive a life cover of a reasonably large amount; it however is riskier than whole life insurance as there is no guaranteed payout. Term life insurance is preferred by individuals who may not be able to afford whole life insurance and who are looking to provide funds to their family to fund specific needs like paying off home loans or funding child’s education, in case of their untimely death. Whole life insurance is, on the other hand, preferred by individuals who are willing to pay a higher premium to provide secure payout to its dependent family.

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