One of the critical factors to be considered while taking a Life Insurance from any of the insurance service providers is, whether to apply for a Term Insurance or a Whole Life Insurance. One simple approach towards this would be to look at the two through a time lens. While a Term Insurance would be applicable for the fixed term or the period that an applicant chooses, Whole Life Insurance, as the name suggests, remains active for the entire duration of a person’s life, until death.
Looking at the two in greater details, one finds that a Whole life insurance is permanent or graded in nature. The policy will stay in force for the life time of the purchaser and if the policy is purchased at a level premium, then the premium for the policy will also not undergo any change for the entire validity period. Neither will the benefit. The premium paid at the time of purchase remains the same throughout the life time of the policy holder, making it the most affordable option available. The premium which get paid accumulates and earns interest for the policy holder, thus it can be said to develop cash values. This cash value is the reserve that the policy holder needs to accumulate in order to pay for the death benefits to the beneficiary at the time of maturity of the policy. The accumulated cash value is reinvested and cash deferred. Usually for this kind of policy, during the initial stages, a larger portion of the premium is channelized to the saving component. During the later stages of life, with the increase in the cost of insurance, the major portion of the premium paid goes towards the purchase of the insurance and lesser towards the saving component.
A whole Life insurance policy also gives the option of borrowing a part of the accumulated reserve to the policy holder, if such a need arises. For a whole life insurance a policy holder continues to pay the premium up to the age of 100 years, if the insured person lives that long. Else upon the demise of the policy holder the death benefits are paid to the nominated beneficiary/beneficiaries. In case the policy holder discontinues paying the premium or and terminates the policy voluntarily, then the cash surrender value is paid back to the policy holder.
A Term Insurance policy on the other hand is a very basic policy that covers the insured for a specific period of time referred to as the term. This kind of a policy, at best, provides protection against accidental death of the policy holder and in certain cases protection against incapacitating injuries as well. Thus, in case the income of a family is stopped midway due to the unfortunate incidence of death of the earning member or the earning member being rendered jobless due to any accidental injuries, the benefit then passes on to the family or the beneficiary. In such a case, the family can sustain the standard of living they were used to prior to the accident or incident. What is equally important as taking a policy is, taking an adequate amount of insurance cover. If the sum insured is too less, then it might not cover the intended financial needs of the family adequately. Also, if the cover is too huge, then the out go in terms of higher premiums would unnecessarily negatively affect the quality of one’s lifestyle.
The first, most basic method for arriving at the amount of sum to be insured for a term insurance is, multiplying ones annual income by ten to twelve times. Liabilities, if any should be added. This amount approximately insures that the family is able to maintain the same standard of living in the unfortunate event of death of the chief wage earner.
Thus, both Term Insurance and Whole Life insurance are financial tools available for preparing and protecting ones family against future events/accidents. While term policy is applicable for a fixed term only, a whole life insurance policy covers a person up till the death of the policy holder and offers options for adjustments in the policy.