What’s the difference between term and whole life insurance?

Life insurance is typically a contract between an insured person and a life insurance provider that pays out a lump sum of money to a beneficiary upon the death of the insured person provided the terms of the contract are met.

But it’s really about so much more than just that contract. It’s about protecting the people you love and helping to ensure that they will always be able to enjoy the lifestyle you planned for them, even when you’re no longer here. When you have adequate life insurance, it means when you pass away that investment you’ve made for the future can help:

  1. Provide money to pay for burial or other final expenses
  2. Ensure your family members are able to sustain their current lifestyle and stay in the home you all love
  3. Cover your debts, including your mortgage
  4. Provide an income for your family
  5. Cover the cost of childcare
  6. Provide a nest egg for your family or a favorite charity
  7. Cover the cost of post-secondary education for your children

Life insurance is a way to show just how much you love the people you’re leaving behind, and how much you want them to be able to continue to enjoy life. Leaving them a financial legacy through the provision of a life insurance policy is truly an act of unconditional love.

Most insurance products fall into three categories: term, whole life and universal life.

Term life insurance provides coverage at a comparatively modest initial cost. It pays a death benefit if you pass away prior to the date the term coverage expires. Although term insurance does not build up cash value, with the relatively lower initial cost it can be useful if you only need insurance for a limited period of time, such as while you have a mortgage.

Term insurance premiums typically stay the same during the initial term period, for example, 20 years. After the initial period, you may be able to renew your coverage, but generally at a higher premium and the premium typically increases every year.

However, for many term products if your insurance needs change, you have an option to convert your term coverage to permanent coverage such as whole life insurance, at a higher cost, based on the age when you convert.

Whole life insurance offers good value, because it may help you build cash value that you may be able to borrow against if you need to. The premium for whole life is typically guaranteed for the life of the contract. And whole life insurance is just that: insurance for your whole life as long as the premiums are paid on time.

Another advantage of whole life insurance is that it might be a “participating policy.” Participating policies may be eligible for dividends. Depending on the dividends options in your insurance contract, these dividends may be taken in cash, applied to reduce your premium, taken in additional insurance or left to increase the cash values. Dividends are not guaranteed.

Universal life insurance provides you with greater flexibility and the potential for accumulating cash value. Universal life has two parts: a life insurance part and a cash accumulation part.

The premium you pay is first applied to the costs for the insurance. If the premium paid is higher than the costs for the insurance, the excess is applied as cash value and earns interest over time, typically on a tax-deferred basis, until withdrawn as cash or applied to help pay the costs of the insurance.

Universal life typically has a guaranteed minimum interest rate that the insurer will apply to the cash value. Unlike whole life policies, universal life insurance uses current interest rates determined by the insurer, which may be above the guaranteed minimum interest rate. This means that if current interest rates go above the minimum guaranteed rate, you may accumulate more cash value that you can withdraw or use to help pay the costs for the insurance.

Life insurance typically has a variety of riders that can be added onto the base coverage, usually available at an additional cost. These riders vary depending on the product, but some examples include income protection in case of disability, children’s term coverage, accidental death and critical illness coverage. There is also a variety of specialized life insurance products, designed to meet more specific needs, such as accidental death and final expense planning.

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