What is the Difference Between Whole and Term Life Insurance Policies?

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If you're thinking about purchasing life cover, you'll first need to consider the kind of policy you're going to need. Most policies you can purchase fall into two main categories: whole and term. In this article, we look at the main features of both and compare them against one another to help you decide which is best. We'll also explore the option of selling your policy as part of a viatical settlement.

Whole Life Cover

Whole Life (or whole-of-life) insurance is precisely that - a policy that covers you right from its start date to the day you die. Upon your death, the provider will pay out a lump sum to the beneficiaries you have named. This type of cover falls into two distinct categories. These are balanced cover, where your premiums stay the same from the start of cover until your death, and your beneficiaries receive a fixed payout, and maximum cover, where your premiums are paid into an investment fund. You can choose various types of payout, such as in trust, which allows the funds to be distributed directly to named beneficiaries and may prevent them from being subject to inheritance tax. Another alternative option is family income benefit, which allows the amount to be gradually paid out to your beneficiaries on a monthly basis over a set period.

Term Life 

As an alternative to whole of life, you can choose a term-based policy. This refers to insurance that covers you over a set period of time. For example, you could arrange it to coincide with the length of your mortgage. There are various types of term policies, including convertible, which allows you to switch to a whole life policy if required. Other options include renewable policies, which allow you to reinstate a term policy that has ended without having another health check, or reviewable versions, which commonly last for five years at a fixed premium rate and are then reviewed by the provider. Your premiums are likely to go up following a renewal or review. 

The payouts of term-based life insurance include the same options that we mentioned under whole life insurance, plus a couple more. You can opt for a level term, decreasing term or increasing term depending on your requirements. Level term insurance provides a payout that is fixed throughout the contract. Alternatively, you may wish to choose a decreasing term option to tie in with a mortgage, as the amount paid out will gradually reduce as time goes on, as will the sum required to settle the rest of the mortgage. An increasing term policy, on the other hand, pays out a fixed additional quantity each year. It can be used to ensure that the amount your beneficiaries will receive remains consistent throughout the term, for example, to tie in with inflation.

Selling Your Life Insurance 

If a policy holder is diagnosed with a terminal illness, they may arrange a viatical settlement. This option allows a person to sell their existing contract for a greater sum than is stated in its cash surrender value - although this amount must be lower than the net death benefit provided. A settlement of this kind will allow the policy to be sold to a third party who then becomes the beneficiary.  The approach is often taken by individuals struggling to pay for healthcare or other major expenses. It's an important matter knowing when a viatical makes sense. You'll first need to determine whether the policy in question will qualify for these kinds of proceedings. Generally, viaticals are only considered when the policy's subject has a life expectancy of under three years. It's absolutely worth weighing up all other possible options before choosing this option, as it represents a major decision. If you feel that action of this kind is right for you, you can estimate the value of your contract in seconds.