Life insurance is something we all need to look into. It may not be the right fit for everybody though. With that said, EDL will briefly cover two life insurance options only (term and whole). We will also provide some examples and mention drawbacks of both options too.
Lets get started. Term life insurance: Try to think of it as a temporary policy. The insured is only covered "if" the insured dies "within" the time period of the life insurance policy.* For example if a person buys a term life insurance plan for two years at the age of 60 and passes away at the age of 63, the death benefits will "not" be paid to the beneficiary. The insured was only covered for two years. The term was expired when they passed and the beneficiary gets nothing.. The previous example demonstrates a major drawback to term life insurance. However a whole life insurance addresses this major problem but has its own drawbacks too.
(Prices will be adjusted according to duration, health, age, etc)
Whole life insurance: This is a permanent policy and has cash value. With this policy there is no term expiration. The beneficiary will receive death benefits whenever the insured dies. There is no need to worry about the problem term life insurance presents. The premiums you pay every year will be more expensive than a term life insurance plan. One reason for the higher premium cost is for the accrual of cash value.
Cash value is used to pay for the higher premium cost in later years. So the insurance company charges you more than they need to in the beginning. The extra money is invested by the insurance company, not you, and is also used to pay the difference in higher premium cost later on in the future.* EDL wants to be clear your premium price will remain the same over the years. It is the insurance company that will use the cash value you have saved over the years to pay for the higher price.
Also if you want to borrow from the cash value you saved over the years, the insurance company will treat it as a loan and charge you interest on the money you saved.*
With a whole life insurance plan, the beneficiary will receive the death benefits only. They do not receive the death benefits plus the extra cash value that has been saved over the years. Instead the cash value is deducted from the insurance paid out to the beneficiary. For example if the insured purchased a $100,000 policy and you save $90,000 in cash value, then the insurance company would deduct all your cash value from the policy paid out. Thus the insurance company only has to come up with $10,000 for the policy. Again the beneficiary does not get the policy coverage plus the cash value saved.
Now there are other policies out there and EDL only covered two options briefly. Each of these plans contain more details. EDL has provided a big picture for you and encourages you to learn more
Smith, M., & Ray Hayhoe, C. (2005). Life Insurance: Term Insurance. Virginia Cooperative Extension,1, 354-144
Smith, M., & Ray Hayhoe, C. (2005). Life Insurance: Whole-Life Insurance. Virginia Cooperative Extension,1, 354-144.
