Conley & Conley Insurance Solutions

Should You Buy Term Life Insurance or Whole Life Insurance?

While term life insurance offers a cheaper means of securing life cover, whole life insurance allows the buyer to save money in addition to enjoy life cover.

First of all it is important to analyse whether one should be purchasing a life insurance or not. If you are the sole or one of the earning members of your family and your death is going to leave somebody in a financial lurch, you definitely should. However, purchasing life insurance is a good protection and could be a sound investment opportunity.

There are two types of life insurances – term life insurance and whole life insurance.

Term life insurance consists purely of insurance protection, which pays a predetermined sum if the insured dies during a specified period of time. On the death of the insured, term insurance pays the face value of the policy to the named beneficiary. All premiums paid are used to cover the cost of insurance protection.

The term or the time period may be one, five, ten, twenty years or longer. But, unless renewed, the insurance coverage ends when the term of the policy expires and becomes worthless. Since this is temporary insurance coverage it is the least expensive to acquire. The main features of term life insurance include temporary insurance protection, low cost, no cash value, usually renewable and sometimes convertible to permanent life insurance. 

For example, a 35 year old smoker takes out a term insurance plan for 10 years with an annual premium of INR 5000. Here, there will be restrictions on the number of years that he can take insurance out for based on his health condition. Also, if he does not claim the amount of insurance before or when it expires, the value will become zero.

One of the major advantages of term insurance plans is the tax benefits it brings under section 80C and section 10(10D). There are numerous types of term insurance plans available including standard term life insurance plan, convertible term life insurance plans and group term life insurance plans.

Whole life insurance plan is a product that offers protection over the insured’s entire lifetime. It is aimed to create fund for the heirs of the policyholder as it provides for payment of sum assured plus bonuses on the death of the policyholder. In other words, whole life insurance provides not only protection cover to the holder but also an investment opportunity.

It charges fixed periodic premiums computed on the assumption that the policy owner can retain the policy for the life of the insured. The death benefit remains same throughout the lifetime of the contract. Insurers invented the level premium concept to make the whole life contract affordable for as long as the policyholder decided to keep it. It is one of the reasons that whole life insurance is also called permanent life Insurance. The main characteristics of the above are: permanent insurance cover, builds cash value, allows for loans to be drawn against the policy, level premiums.

For example, ‘A’ draws a whole life insurance and is required to deposit 2000 INR as premium annually. A part of this premium will be used to invest and will in turn provide a cash value (like a savings account), which A can borrow or spend from. The balance will be for death benefit cover. 

Which one is better? Term Life or Whole Life?

  1. Longevity: Whole life insurance has a greater lifetime than term life insurance and is not required to be renewed.
  2. Expense: Whole life insurance is generally more expensive than a term life insurance.
  3. Dividends: Whole life insurance provides continuous dividends unlike term life insurance, which can be claimed only once at the time of the expiry of the policy. However, the dividends of whole life insurance remain constant. 

So what we see is that it depends upon a person’s predicament whether he should opt for whole life insurance or term life insurance. For example, if a prospect is young about 25 years old – they should ideally purchase insurance with a longer term. However, they are just starting out in their careers and so, cash is pretty low. Therefore, they might opt for term life insurance instead of whole life insurance because it is cheaper.

When we look at it overall – there is no doubt about the ideal insurance which is to be purchased is whole life insurance. It provides you the opportunity to invest and protect at the same time and it allows you to protect your beneficiaries – your loved ones by leaving behind a good sum of financial help depending on the amount insured.

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