Even though it’s called life insurance, it might not last forever. And by forever, we mean your whole life. Many life insurance policies expire once the insured reaches a certain age to limit the liability of the insurance company. Their risk, when it comes to paying out for death of natural causes, becomes certain (and thus too risky) which has seen many insurance companies offer term life insurance. But there’s more to it than that.
Term life insurance
As the name indicates, term life insurance refers to those life insurance policies which have a death benefit which expires. That is, once the insured reaches a certain age, the policy will no longer pay out for his or her death. The policy will expire. Many insureds opt into such an insurance policy because it is cheaper than whole life insurance because there is no guarantee that the life insurance company will pay out.
As most breadwinners no longer have dependents when they retire, they might opt into this type of policy. It is also mandatory for insureds who have borrowed money from a bank to buy a home to have life insurance. Often term life insurance is taken out to cover the outstanding amount on a bond, the payout of which reduces each year as more of the home loan is repaid. This means the premiums reduce too.
Whole life insurance
Whole life insurance refers to those policies that do not expire. The insured is guaranteed a pay out because the death benefit does not expire. Some whole life insurance policies may include a death benefit which converts to annuities (that is, the payout is returned to the insured over a number of years by way of smaller lump sums), but it is still whole life as the annuities can be bequeathed.
Whole life insurance policies are more expensive than term life insurance because it is guaranteed, whether by a death payout or annuities, that the insurance companies will be giving you or your beneficiaries money. Whole life insurance is usually offered through a brokered life insurance company.
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