Chances are, if your employer provides life insurance coverage, you have no idea whether it’s whole or term. Most Americans who receive life insurance as part of a benefits package never bother to pay attention to anything other than the beneficiary amount. However, if you are self-employed or simply interested in your benefits, you may want to understand more about life insurance.

Term life insurance is perhaps the concept that most readily comes to mind. This policy is straightforward insurance that pays the beneficiary the secured amount of the policy when the insured dies.

There are two types of term insurance premiums that can be paid into the policy: Level and annual renewable. Level term premiums remain constant through the life of the policy term which can range from one to 30 years, depending on your policy. On the other hand, annual renewable policies are renewed once a year, and premiums increase with your age.

Many term policies are flexible, allowing you to convert to whole life without a medical exam.

Whole life insurance carries the same basic features of term, but also has an investment component in the form of stocks, bonds or other investment instruments.
There are two basic portions to a whole life policy—mortality and reserve. The mortality portion of your premium goes to insurance coverage, while the reserve portion is directed to an investment. Over time, more of your premium goes into the mortality component of your policy.

Your whole life policy will accumulate cash value over time. In some situations, you may be able to borrow against its value or pay a surrender fee and cash-out a reduced amount of the accrued cash value. Whole life policies can also be used as a part of the overall estate-planning process. An insurance trust can be created, which will apply the proceeds of the policy to estate taxes after death.

Before purchasing a whole life insurance policy, consult a financial planner, actuary or accountant. These professionals can analyze the policy to evaluate the strength of its investment component. Just as with any other investment, it is important to know exactly where your money is going. While many term life insurance sales representatives will tout whole life insurance as “forced retirement savings,” some financial experts caution that other investment strategies may offer a much better return on your investment.

Whole life will typically cost more than term due to the investment component. Both whole and term life policies generally begin to increase in cost when the insured is over the age of 50.

By Darryl James

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