Distinguishing Main Types of Life Insurance Policies: Term Policy v. Whole Life Policy

While the primary reason people purchase life insurance policies is to provide financial security for loved ones, life insurance coverage also can constitute a valuable financial tool which can be an important part of an estate plan.  One of the fundamental questions that must be addressed prior to obtaining a policy involves the best type of life insurance.  The choice will depend on the goals and circumstances of the policyholder.

Term and whole life coverage are the two basic types of life insurance policies.  The basic structure of term coverage involves a policyholder paying premiums on a quarterly, monthly or annual basis for a pre-agreed period, such as 5, 10 or 20 years.  If the insured passes away during the policy term, the beneficiaries receive a specific amount of money as indicated by the policy.  If the named insured does not die during the policy term, the insurance policy does not pay out a benefit.  While an insured will typically be permitted to purchase a new policy or renew the policy, the policyholder might be required to pay a higher policy premium.

While whole life policies (also known as ‘cash value” or “universal life”) also involve making premium payments, the payments are made over the entire life of the policyholder rather than a designated term.  Although a term policy pays nothing unless the insured dies during the term, a whole life policy pays a benefit to the beneficiary regardless of the point during the policy term that the insured passes away.

The whole life policy builds a “cash value” because the insurer is making premium payments, which can be utilized in a number of ways:

  • Cashing Out: The insured can cancel this policy and receive a lump sum payout from the policy.  This amount paid is referred to the “surrender cash value” of the policy. 
  • Borrowing against the Policy: A loan based on your whole life policy provides several advantages over a traditional loan.  The insured does not have to qualify for the loan or even undergo a credit check.  The insured also is not required to comply with a particular repayment schedule.  The limit of this type of loan is that the maximum amount that can be borrowed is the “cash value” of the policy.
  • Using Cash Value to Make Premium Payments: If an insured becomes strapped for funds to make premium payments, the cash value of the policy can be used to make premium payments.  This method of making premium payments can be employed until the cash value of the policy has been exhausted.

If you have been denied death benefits as the beneficiary of a life insurance policy, we might be able to help you seek benefits under the policy and extra-contractual compensation.  When an insurance company fails to act in good faith in processing a beneficiary’s claim, this can merit a lawsuit for insurance bad faith.  My law firm represents policyholders in claims disputes in Miami and throughout Florida. The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations. No Recovery, No Lawyer Fees. Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

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