Term life insurance provides for life insurance coverage for a specified term of years for a specified
premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where
the premium buys protection in the event of death and nothing else. Term insurance premiums are typically
low because both the insurer and the policy owner agree that the death of the insured is unlikely during
the term of coverage.
The three key factors to be considered in term insurance are: face amount (protection or death benefit),
premium to be paid (cost to the insured), and length of coverage (term).
Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed
by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash
values, fixed and known annual premiums, and mortality & expense charges will not reduce the cash value
shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate
of return in the policy may not be competitive with other savings alternatives.
Riders are available that can allow one to increase the death benefit by paying additional premium. The
death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed
and may be higher or lower than historical rates over time. Premiums are much higher than term insurance
in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life
Cash value can be accessed at any time through policy "loans". Since these loans decrease the death
benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of
the insured; the beneficiary receives the death benefit only. If the dividend option: Paid up additions is
elected, dividend cash values will purchase additional death benefit, which will increase the death benefit
of the policy to the named beneficiary.
Guarantees are based on the claims paying ability of the insurance company.
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