Life insurance is a crucial component of financial planning, providing financial protection and security for loved ones in the event of an individual’s death or critical illness, if elected. Two common types of life insurance policies are Term Life Insurance and Whole Life Assurance. While both serve the purpose of providing a death benefit, they differ significantly in terms of coverage, duration, life insurance cost, and investment features. Let’s delve into the differences between Term Life Insurance and Whole Life Insurance to help individuals make informed decisions about which policy aligns best with their needs and goals.
One key point to note is in the title, INSURANCE or ASSURANCE, Term Life Insurance will pay out if you claim during the period of cover, it will Not pay out after the term is over. This is the link to the definition of ASSURANCE!
Whole of Life (assuming you maintain the premiums according to the policy) WILL payout eventually, you will die or contract a critical illness eventually, therefore it is Assurance not Insurance.
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Introduction
Life insurance is a type of insurance policy that provides financial protection to your loved ones in the event of your death. It can help pay off debts, funeral expenses, and other final costs, ensuring that your family’s financial well-being is protected. With life insurance, you can have peace of mind knowing that your loved ones will be taken care of, even if you’re no longer around.
What is Life Insurance?
Life insurance is a contract between you and an insurance provider, where you pay premiums in exchange for a cash lump sum payment to your beneficiaries if you die during the policy term. The policy can be tailored to your individual needs, with options for level cover, decreasing cover, or increasing cover. You can also choose the length of the policy term, which can range from 5 to 40 years.
How Does Life Insurance Work?
Life insurance works by providing a financial safety net for your loved ones in the event of your death. When you take out a life insurance policy, you pay premiums to the insurance provider, who then pays out a cash lump sum to your beneficiaries if you die during the policy term. The cash lump sum can be used to pay off debts, funeral expenses, and other final costs, ensuring that your family’s financial well-being is protected.
1. Term Life Insurance:
Definition: life insurance policy
Term Life Insurance provides life insurance cover for a specific period, typically ranging from 10 to 30 years. If the insured individual dies during the term of the policy, the beneficiaries receive the death benefit. However, if the insured survives the term, the policy expires, and no benefits are paid out.
Coverage:
Term Life Insurance offers pure death benefit protection without any cash value accumulation or investment component. It provides a straightforward and affordable way to secure coverage for a specific period, such as until retirement or until children are financially independent or to cover liabilities such as a Mortgage Loan
Cost: monthly payments
Term Life Insurance premiums are generally lower compared to Whole Life Insurance premiums, especially for younger and healthier individuals, but various factors can influence life insurance costs. Premiums are generally fixed for the duration of the term but may increase upon annual renewal in some countries also if the insured chooses to extend coverage.
Flexibility:
Term Life Insurance offers flexibility in terms of coverage duration and coverage amount. Policyholders can choose the term length and death benefit amount based on their financial needs and budgetary constraints. Some policies have “Riders” which can include, Critical Illness, Permanent Disability and so forth
2. Whole of Life Assurance
Definition:
Whole of Life Assurance provides coverage for the entire lifetime of the insured, as long as premiums are paid. Whole of Life Assurance can also be structured as joint life insurance, covering two individuals under one policy and paying out upon the death of the first insured party. In addition to the death benefit, Whole Life Insurance policies include a cash value component that accumulates over time, providing a form of savings or investment. However this “growth” is there to pay for coverage after you have finished paying premiums and until you die there needs to be some value in the policy, some type of plans can also provide an income subject to conditions of 5% of the policy value per year such as Universal Life.
Coverage: critical illness cover
Whole of Life Assurance offers permanent coverage, ensuring family financial protection by guaranteeing that beneficiaries receive the death benefit whenever the insured passes away, regardless of age. The policy also accumulates cash value over time, which can be accessed through policy loans or withdrawals during the insured’s lifetime, however this may effect the sustainability of the cover or the sum assured if funds are withdrawn.
Cost:
Whole of Life Assurance premiums are generally higher than Term Life Insurance premiums due to the permanent coverage and cash value component. Premiums remain level throughout the life of the policy and are structured to cover both the insurance risk and the cash value accumulation. However in some jurisdictions eg the UK, the provider is required to do a sustainability check periodically, for example if the investment growth was less than expected, then this would effect the policy. You would have to pay increased premiums or reduce the sum assured figure.
Investment Component:
Whole Life Assurance policies include a cash value component that earns interest or grows in value over time, providing a tax-deferred savings vehicle. Policyholders can use a life insurance calculator to estimate the amount of coverage needed to meet their financial goals and ensure adequate protection. Policyholders can access the cash value for various purposes, such as supplementing retirement income, funding education expenses, or covering emergency expenses. However it is extremely important to keep a check on this growth as it can effect the policy duration and potential payout if this growth does not match the initial illustration provider to the client.
Jumbo or Universal Life
This is a variant of traditional Whole of Life Assurance but now popular with HNW individuals, typically cover starts at $1m rising to over $200m for UHNW. Potential policyholders can obtain a life insurance quote to understand the cost and benefits of Jumbo or Universal Life policies. These policies have extremely cost effective investment elements, some linked to the major indices like the S & P 500, also some have a “floor” meaning that if these indices fall then the client can not lose funds or capital.
An example
David Smith is a 45 year old non-smoker, who lives in the Middle East, where he runs his own business. He needs life cover for his family and business, but also knows he has a pension shortfall, which is worrying him.
He can’t afford to take unnecessary risks and is wary of stock market fluctuations.
Instead, he invests a $1m single premium into a plan favouring a Performance Index linked investment.
He then plans to withdrawal 5% of the accumulating Account Value when he retires at age 65, whilst keeping the cover in place.
· Up Front Premium $1m Life Cover for the rest of David’s life
· $4,201,523 Total Income Taken by age 85
· $2,661,552 Remaining Policy Value at Age 85
An assumed average growth rate of +6.3% with the S&P500 – Less than historically achieved since 1957
Additional Considerations
When considering life insurance, there are several additional factors to take into account. One important consideration is critical illness cover, which can provide financial support if you’re diagnosed with a serious illness.
Critical Illness Cover
Critical illness cover is a type of insurance policy that pays out a cash lump sum if you’re diagnosed with a serious illness, such as cancer or a heart attack. This can provide financial support during a difficult time, helping you to pay for medical treatment and other expenses. Critical illness cover can be added to your life insurance policy, providing an extra layer of protection for you and your loved ones.
It’s worth noting that critical illness cover pays out a cash lump sum if you’re diagnosed with a serious illness, whereas life insurance pays out a cash lump sum if you die during the policy term. Both types of cover can provide financial support during difficult times, but they serve different purposes.
When considering critical illness cover, it’s essential to think about your personal circumstances and how much cover you need. You should also consider the cost of the cover and how it will affect your monthly payments. It’s always a good idea to speak with a financial advisor or insurance expert to determine the best course of action for your individual needs.
In conclusion, life insurance is an essential consideration for anyone who wants to protect their loved ones’ financial well-being. By understanding how life insurance works and considering additional factors such as critical illness cover, you can make informed decisions about your financial protection.
Conclusion: family financial protection
Choosing between Term Life Insurance and Whole of Life Assurance depends on individual circumstances, financial goals, and risk tolerance. Term Life Insurance offers affordable coverage for a specific period, making it suitable for individuals with temporary needs, limited budgets or finite risks they wish to cover.
Whole of Life Assurance provides permanent coverage, cash value accumulation and investment features, making it a long-term financial planning tool for individuals seeking lifelong protection and wealth accumulation. By understanding the differences between Term Life Insurance and Whole of Life Assurance, individuals can select the policy that best meets their insurance and financial objectives. Its important to take professional advice, please CLICK HERE to book a free no obligation introductory meeting with Robin