Personal Life Insurance Plans

Term vs. Whole Life
Personal Life Insurance Plans

Like many other life insurance plans, personal life insurance plans are genearally split into two categories: term plans and permanent, or whole-life plans. Personal term life insurance plans are policies taken on a single person for a specific amount of time, typidally in one-year and five-year increments. Permanent personal life insurance plans are set to insure a single person (insured party) for the duration of that person's life.

Term policies

There are a few important benefits you will receive from choosing a term policy for your personal life insurance plan. The most important is that in most cases, term plans are less expensive than permanent, whole-life plans. Some term policies are catered specifically toward insuring single parties rather than carrying on the many different options involved in whole-life or group life insurance plans, personal term policies often trim the fat and offer individuals a cost-effective personal insurance plan that fits their needs. This make term policies a sensible choice for a personal life insurance plan.

The second major benefit of using a term policy for a personal life insurance plan is the ability to cancel or opt out of the policy at regular intervals, typically upon renewal of the policy's term. Depending on the policy, this can be anywhere from every few months to every five years. Term plans are much more like a recurring subscription than a permanent investment, so a personal term policy is usually the best choice for people who are planning a change in lifestyle, profession, or whose future plans include non-permanent risks to personal safety.

The last notable benefit of using a term plan for personal life insurance is the stability that term plans usually provide. Coverages are guaranteed, premiums are fixed and known, and there is generally very little "fine print" involved with term policies. In contrast, some of the newer forms of whole life insurance plans are quite complicated because premiums are tied in with market rates, which makes payments and dividends fluctuate in ways that the policy holder has little control over, much like an adjustable rate mortgage.

The one notable downside of practically every term personal life insurance plan is that when the term expires, the coverage ends, and the insured party receives nothing. This is the major difference between term plans and many of the whole life plans, which carry with them an interest-bearing account and an eventual payout from the policy.

Whole Life Policies

Whole life insurance plans are the other option if you do not want short-term personal life insurance coverage. Whole life plans carry their own set of attractive benefits which are quite diferent from term plans.

Whole life insurance plans cover the insured party for the duration of life, rather than until the end of a term. In addition to coverage, whole life insurance plans also create cash value as they mature. This balance can be borrowed against, and it can also be used to pay the premiums of the plan. In theory, if the cash value does well, this balance can be used to pay off the entire policy in just a matter of several years. How often this happens is debatable, but in 2010 it is not a likely outcome of a whole life plan due to the current state of financial markets.

Traditional whole life insurance plans provide the insured party with guanrnteed minimum teturns on the premiums they pay, so in addition to receiving coverage, the policy holder receives a cash back percent on their premiums. As mentioned above, other whole life insurance plans are tied to industry and market performance, so they can provide higher returns rates on the cash value of the policy. However, in a slow economy or recession, these "interest-sensivite" whole life insurance plans do not do well at all and can end up costing the policy holder much more than their coverage is worth. Insterest-sensitive policies are not recommended for any personal life insurance plan during a recession. Also, with a large sum of money you can invest in a single premium plan, in which the entire premium is made in a single payment.

The other notable difference between term and whole life insurance plans is the likely payout that comes after fulfilment of a whole life insurance premium. Term plans do not include any kind of payout, maturity, or cash back at the end of the policy's term. Whole life plans often include some kind of payout in addition to the continued coverage offered in the policy.

If you are considering using a whole life insurance plan because you are attracted to the cash back value it offers, think carefully about the rates that your potential providers are offering. Whole life insurance rates are usually painfully small, and there are many stable and more profitable ways of investing your money than with a life insurance plan.

An important final consideration about whole life plans is that insurance companies profit substantially more from selling whole life plans than they do from selling term plans. This does not diminish the value of whole life insurance in any way; it simply means that potential insurers will likely try to sell you on a whole plan, regardless of whether or not it is right for you.

You can think of the differences between term and whole life insurance plans as the difference between renting and owning a house. When you are done renting, you have no asset and no roof over your head, but the price was cheap while you were there and you had no obligation to stay. Buying a house is a more costly and long-term investment, but when you have paid it off the house remains yours and pays you back with time. Which option is best for you regarding a personal life insurance plan depends on your needs and your short and long-term goals.