UK residents use life insurance to provide their loved ones with financial assistance. Since life insurance is a substantial financial investment, research and careful consideration are recommended. Whole life and term life policies are the two major types of life insurance available in the UK.
There are advantages to each one and there is no best policy for every personal situation.
Term Life Vs. Whole Life
The period covered by the policy is what distinguishes term life insurance from whole life insurance. Term life runs for a designated period that can be as short as one year to up to 40 years. Once this period is exceeded, the contract ends and the individual may either purchase a new policy or remain uninsured.
Age is one of the determining factors for life insurance premiums so a new policy could be more expensive due to the older age of the applicant. With age may come health conditions that also increase premiums.
Whole life insurance, on the other hand, covers the remaining lifetime of the individual insured. Since this may be several decades, premium for a whole life policy may be three or four times higher than what is charged for a term life policy with the same benefit.
With whole life, a new policy is not required later in life when premiums would be higher and medical conditions could be present that prevent approval. Though a whole life policy may be cancelled any time, premiums that have already been paid will not be refunded.
Term life and whole life policies have another major difference in that whole life provides protection and represents an investment while term life offers protection only. A term life policy beneficiary receives nothing more than the face value of this policy. A beneficiary of a whole life policy receives a minimum guaranteed benefit and proceeds from the investment.
A term and whole life policy may have the same initial death benefit and it may seem appealing to earn an additional amount through whole life investments but gains are not guaranteed. The type of investment is restricted as stated in the whole life policy. The policyholder must make payments into it throughout the time that the policy is in place. If this investment performs poorly, the benefit may be less than what an equivalent term life policy provides.
Premiums for Term Life and Whole Life
Term and whole life insurance premiums are established at the start of the contracts and are leveraged throughout the contract terms so they will not change while the policies are in force. The extended coverage period of a whole life policy reveals why the premium for whole life coverage is usually higher than a term life premium is. In addition, the investment aspect of whole life increases its premium.
Though this investment is subject to tax and never guaranteed to offer a return, it may be borrowed against by the policy owner.
The answer to which policy is best depends on the personal situation of the insured. A whole life policy is usually best for people who are wealthy. It can be written in trust and proceeds may be used for estate planning. People who are at least 60 years old may also benefit more from a whole life policy because term life coverage may not be available to them. Younger individuals may find term life more suitable due to its lower premiums.