The major difference to notice while you compare term insurance with whole life insurance is that a term life insurance plan serves only as a protection plan, while a whole life insurance policy provides dual benefits of insurance plus investment.
A term insurance plan has 3 major components; namely, face amount known as death or protection benefit, cost to the insured i.e. the premiums to be paid, and the term, which is the total duration of the cover. A policy expires after its term is over. In case of policyholder’s unfortunate demise during the policy term, the nominee or the beneficiary is entitled to the face amount or the death benefit.In case the insured person survives the entire term of the policy, then no benefit shall be payable and also the policy comes to end. In a way, term insurance is a lot like car insurance, where in case your car meets with an accident during the policy term, you get the compensation amount from the insurer. But you would not receive any benefit if your car doesn’t meet with an accident within the term.
While, a whole life insurance policy is a permanent life insurance policy, meaning that it has a savings component involved in addition to the life protection cover. A fraction of premium paid by the policyholder is contributed towards the life insurance, while the other bit is invested on the insured’s behalf and built as Cash value. If the insured survives the term of the policy, then this cash value is given to him. The policyholder under a whole life insurance policy can also borrow money against this Cash Value. This cash value is otherwise invested in stocks, bonds or other money-market instruments. The gain so accrued is a tax-deferred income if the policy is cashed while the policyholder is alive. However, this gain is tax-free in the hands of the beneficiary, i.e. after the demise of the policyholder.
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Term Insurance Policy |
Whole Life Insurance Policy |
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Considerable Factors |
Policy premiums, total benefit, policy term. |
Payout, Premium, Policy cash value, participating/non-participating. |
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Definition |
A Term Insurance Plan is the basic form of a life insurance plan and is said to be the pure life insurance protection, where death benefit shall be payable by the insurer in case of policyholder’s demise during the policy term, while there no benefit paid at the time of maturity. |
A Whole Life Insurance Policy is basically a life cover without a specified term. The death benefit under this type of insurance is paid on policyholder’s demise; whenever it might occur. |
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Death Benefits |
Death benefitunder a Term Insurance Plan is paid only in event of the policyholder’s demise during the term of the policy. |
Death benefit of a Whole Life Insurance Policy is paid on the demise of the insured person; up to an age of 100 to 120 years. |
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Cost of Premiums |
A Term Plan is the most low-cost form of life insurance as it requires a very nominal amount of premiums because the policy in this case may end without paying out. |
A Whole Life Insurance Policy involves higher amount of premiums because such plans, in every case, eventually pay out and also build a cash value. |
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Categories |
Term insurance plans can be categorized into guaranteed level and annual renewable. |
Whole life insurance policies are of the following types: participating, non-participating, single premium, and limited pay. |
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Benefits |
Term insurance plans are comparatively less expensive and affordable. |
Level premiums distributed throughout life of insured and more affordable. |
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Policy Term |
Commonly, the term options in a term insurance plan are30, 20, 15, or 10 years. |
Whole Life. |
Cost-Based Comparison of Term Insurance Policy and Whole Life Insurance Policy
A Whole Life Insurance Policy is way more costly than a term insurance policy. Most of the time, there are hidden costs involved in the cost of Whole Life Insurance Policies, such as:
- The fees and commissions involved in a whole life insurance policy can take away about 3 %of the annual returns from the policy.
- The up-front, but hidden, commissions are typically said to be 100% of the premiums paid in the first year. Therefore, it is usually impossible to estimate the level of returns on the investment as it is difficult to calculate the amount of your premiums that has gone towards investment and also the part towards insurance.
Choosing the best for yourself
The basis on which you compare term Insurance with Whole Life Insurance is different for different stages of life. It might vary from person to person. Therefore, choosing the right one is all about the need of the time. An unmarried individual, for example, would be better placed if he buys a term insurance plans. While, a whole life insurance policy would best suit the needs of a married man, who is in his late 40s and has two mature kids. On the other hand, for another man, who is less that 40 years of age and has 2 small kids, a whole life plan with a term rider is the best.
• A Whole Life Insurance Policy helps the insured to financially secure the future of his family but it is very important to be vigilant while deciding the amount of the risk cover. The amount of risk cover is preferable to be kept of the lower side.
• It is a must to confirm the policy’s surrender and also if the policy allows partial withdrawals without penalty.
• Experts suggest that one must include riders in his life insurance plan, irrespective of the type, because this can help maintain the benefits of insurance as per the policyholder’s age profile. For instance, an insured person, who is a father, by opting for 'waiver of premium' rider can ensure that the burden of the policy’s premiums does not fall on his family or children in case of his demise before the policy gets matured.
• Some other riders that can be opted in life insurance plans are critical illness rider, accidental and permanent disability rider. So compare life insurance plans and get one for you soon.
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