Life insurance products generally can be classified either as term policies or as whole life policies. The distinction is important, because each type of insurance vehicle brings its own set of advantages and disadvantages. A term life insurance policy is essentially a death benefit payable only within a designated time period. A whole life policy is a hybrid of an insurance policy and an investment vehicle, the length of which is variable at its owner's discretion. Term life insurance policies can offer purchasers significant advantages over other insurance products, including their substantially lower cost, the freedom to select the length of the coverage term and the ability to secure only the level of coverage necessary to meet specific, time-sensitive financial obligations.
Term life insurance policies are often preferred by younger people concerned about providing for their spouses and children in the event of an untimely death. Of particular concern to such purchasers are financial obligations such as home mortgages and educational expenses. A primary advantage of term policies is that it is possible to obtain insurance products designed to last only as long as the purchaser's mortgage term, or until his or her youngest child is projected to complete college. Term policy providers frequently offer customers the ability to purchase incremental renewals, as long as there have been no major changes in health status or other key criteria. In this way, term life insurance policies provide peace of mind for those with short-term concerns and young dependents.
Another popular feature of term life insurance is the fact that it is substantially more affordable than whole life coverage. Term policies offer a death benefit within a specified period of time and nothing more, thereby reducing their cost. By contrast, whole life policies are characterized by an investment function and, therefore, entail greater expense. Though term policies do not accrue cash value the way whole life policies do, that very fact enables consumers to acquire larger coverage amounts at a lower price than would otherwise be possible.
Whole life insurance products offer policyholders the option of discontinuing premium payments during their lifetime to redeem the accrued cash value. It may be that a good percentage of the premium amounts paid over time could be recouped, though this would depend in large part on whether the insurer had a successful investment record. By contrast, term life insurance offers policyholders the freedom to do their own investing in a more aggressive, growth-oriented manner instead of relying on the typically cautious strategies employed by insurance companies.
