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What is the difference between term life insurance and whole life insurance? Does term life cover you for a short term and whole life for your entire life?
Hi there,
Term life insurance is life insurance which covers you for a specific period of time. If you die within that period of time, your beneficiaries receive a guaranteed amount of money - the "benefit". The downside of term life insurance is that you can only remain covered until you reach a certain age. So while it insures you against premature death, it doesn't benefit anyone if you die of old age.
Whole life insurance - also known as permanent life insurance or mixed life insurance - combines term life insurance with savings. In addition to the regular premium for term life insurance which covers you if you die within a specific period of time, you also pay an additional premium. The additional premiums you pay accumulate in your policy as savings to make up its "cash value". If you die after the term life insurance has expired, the money which has accumulated in the policy is paid out as a benefit to your beneficiaries. Some whole life insurance policies offer "living benefits" - meaning you can withdraw the cash value while you are still alive.
There are many variations of both term and whole life insurance. In some cases, whole life insurance with living benefits is used to fund retirement. In Switzerland, whole life insurance policies based on the 3a, 3b and 2a (vested benefits) categories of tax-preferred retirement savings are offered.
However, the costs associated with whole life insurance policies detract from their attractiveness as a saving solution. In most cases, using separate term life insurance and retirement savings solutions (3a savings accounts, for example) works out cheaper than getting whole life insurance.
Best regards from Moneyguru
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