Term and whole of life insurance: what’s the difference?

Did you know there are different types of life insurance? They are valued differently and end at different times. But which is the most appropriate for your circumstances, and, more importantly, your loved ones needs?
Life insurance isn’t for the person who takes it out: it’s for his or her dependants. People take out life insurance policies so they can be sure that after they die, their family members will not face financial hardship. Did you know that your insurance policy may expire when you reach a certain age? Term life and whole of life insurance are two very different categories of life insurance policy – and each has various sub-categories as well.

Term insurance

Term insurance is life insurance that covers a person for a set amount of time. It is renewed with the insurer each year and premiums tend to increase as the person insured ages. Most policies pay out upon death from illness or accident. The insurance is not tax deductible but any payout is. Most term life policies expire when the person insured reaches age 60 or 65 years old.

Whole of life insurance

Whole of life insurance is life insurance that a person intends to pay to an insurance company for the rest of his or her life, even if they live to be 92 or more. Apart from indexation, the premium remains the same throughout the person’s life. At death, the insurance company pays out the full amount of the insurance, as well as a yearly bonus. If the policy is cashed out before death, the amount received will depend on how long the person has had the policy. It’s a bit like an investment and an insurance policy in one product.

The differences

• Term insurance is usually cheaper than whole of life insurance.
• Term insurance premiums increase as the insured person ages, but whole of life insurance policies have a fixed premium rate that remains consistent for the entire length of the policy, though it is indexed for inflation.
• Whole of life insurance has an investment portion, which is paid out when the policy matures, regardless of whether the person taking out the insurance has died.
• Term insurance does not have an investment portion.

Which life insurance?

While whole of life insurance can result in a greater payout, a term insurance policy can result in a greater profit if the savings made on the cheaper premium are invested into other assets. However, whole of life insurance may still be cheaper, depending on the health and age of the person taking out the policy, and other factors that vary from person to person. In all cases, shopping around can result in significant savings as the market is very competitive.