If you’re shopping around for life insurance, you might want to take a bit of time to work out exactly what type – or term – you need. While you might think you’re getting plain old life insurance, it’s important to understand that there are different policies that result in different outcomes.

Essentially, you can choose between term life insurance or whole life insurance. But do you even know the difference between them?

Term Life Insurance

Term life insurance give you cover for a specified term at an agreed rate of payment. Once the agreed term expires, your policy no longer covers you. At this point, you have the option of signing up for more coverage or agreeing to continue existing coverage, but at different payments.

Essentially, you agree to make your premium payments for that year. At the end of the year, you’ll receive a policy renewal notice, informing you of your amended premium payment amounts in order to keep your cover active.

As long as the premium payments are kept up throughout the term, the policy holder is covered and can make a claim in the event of something happening. The face amount on that policy will be paid to the beneficiary only on the death of the policy holder.

If you were to stop paying your life insurance premium or decide not to renew your policy after a term had expired, you would no longer be covered. Term life insurance will only pay out if there is a claim for your death during the policy term.

Whole Life Insurance

Whole life insurance is rather different to term life insurance, in that there is an insurance component to the policy that covers the policy holder in the event of death, but there is also an investment component. This means the money paid into the policy is invested in an effort to increase the cash value.

Essentially, whole life insurance is designed to extend for the policy holder’s entire life. However, some policies can be set to pay out on an agreed maturity date that offers a cash value payout to the policy holder without him or her actually passing away.

As with Term Life Insurance, you still need to pay regular premiums as per the agreed policy arrangement for the life of the policy. However, some insurance companies may allow you to make payments in advance. This may be one very large premium paid up front, or paying for several year’s worth of premiums in a lump sum.

The cash within the policy may be invested in managed funds or cash as a way to earn interest on the money accrued within the policy. This is designed to assist with growth of the cash value over the long term.

Many Life Insurance brokers and advisers may refer to this type of Whole Life Policy as being a form of retirement savings. They may point out the benefits of paying a premium each month that equates to a type of forced savings that builds each month over the term of the policy.

If you’re shopping around for life insurance, you might want to take a bit of time to work out exactly what type – or term – you need. While you might think you’re getting plain old life insurance, it’s important to understand that there are different policies that result in different outcomes.

Essentially, you can choose between term life insurance or whole life insurance. But do you even know the difference between them?

Term Life Insurance

Term life insurance give you cover for a specified term at an agreed rate of payment. Once the agreed term expires, your policy no longer covers you. At this point, you have the option of signing up for more coverage or agreeing to continue existing coverage, but at different payments.

Essentially, you agree to make your premium payments for that year. At the end of the year, you’ll receive a policy renewal notice, informing you of your amended premium payment amounts in order to keep your cover active.

As long as the premium payments are kept up throughout the term, the policy holder is covered and can make a claim in the event of something happening. The face amount on that policy will be paid to the beneficiary only on the death of the policy holder.

If you were to stop paying your life insurance premium or decide not to renew your policy after a term had expired, you would no longer be covered. Term life insurance will only pay out if there is a claim for your death during the policy term.

Whole Life Insurance

Whole life insurance is rather different to term life insurance, in that there is an insurance component to the policy that covers the policy holder in the event of death, but there is also an investment component. This means the money paid into the policy is invested in an effort to increase the cash value.

Essentially, whole life insurance is designed to extend for the policy holder’s entire life. However, some policies can be set to pay out on an agreed maturity date that offers a cash value payout to the policy holder without him or her actually passing away.

As with Term Life Insurance, you still need to pay regular premiums as per the agreed policy arrangement for the life of the policy. However, some insurance companies may allow you to make payments in advance. This may be one very large premium paid up front, or paying for several year’s worth of premiums in a lump sum.

The cash within the policy may be invested in managed funds or cash as a way to earn interest on the money accrued within the policy. This is designed to assist with growth of the cash value over the long term.

Many Life Insurance brokers and advisers may refer to this type of Whole Life Policy as being a form of retirement savings. They may point out the benefits of paying a premium each month that equates to a type of forced savings that builds each month over the term of the policy.

What many brokers don’t point out is that there often isn’t a clear way to determine how much of the premium amount is paid towards the insurance component and how much is going into the investment portion.

Which Is Best?

When it comes right down to it, the difference in the amount of premium you pay is quite large. Term Life Insurance is significantly cheaper each month than paying Whole Life Insurance.

If you were to do the sums, you need to work out how much you’ll pay for the lower insurance premium for Term Life right now. Add to these sums the difference in payment amount being paid into your own superannuation savings to compound over the same length of time. Average out a rate of return for your own super fund and see what the cash value of your super is by retirement age.

Then do the sums for the much-higher Whole Life Insurance premiums, with less going into your own super account. If you’re happy with the results, you have your answer. What many brokers don’t point out is that there often isn’t a clear way to determine how much of the premium amount is paid towards the insurance component and how much is going into the investment portion.

Which Is Best?

When it comes right down to it, the difference in the amount of premium you pay is quite large. Term Life Insurance is significantly cheaper each month than paying Whole Life Insurance.

If you were to do the sums, you need to work out how much you’ll pay for the lower insurance premium for Term Life right now. Add to these sums the difference in payment amount being paid into your own superannuation savings to compound over the same length of time. Average out a rate of return for your own super fund and see what the cash value of your super is by retirement age.

Then do the sums for the much-higher Whole Life Insurance premiums, with less going into your own super account. If you’re happy with the results, you have your answer.