The Two Different Types of Life Insurance Policies
There is quite a discussion taking place these days on which is the best way to go about insuring your life. This type of discussion doesn't occur with fire cover and general types of insurance but when it comes down to your life the whole question opens up to quite diverse opinions. The best way to approach the whole matter is to first determine the differences between the two types of insurances that are involved: term life insurance and whole of life assurance.
Term Life Insurance
Term life insurance is the closest you will come to equating life insurance to that of insuring your home, boat, caravan or car. As its name suggests term life insurance is insurance taken out for a certain period of time and when that term expires the insurance in no longer in force.
If the insured person had have died during the term the beneficiaries would have been paid the amount of insurance cover stated in the policy. If the insured person outlives the term, the insurance company gets to keep all the premiums that had been paid over the entire term that the insurance was in force.
If the previously insured person wanted to continue with the insurance he or she would have to take out a completely new policy and start again. This new policy will cost more than the previous one because the insured person will be older and the risk the insurance company is taking will be greater. Term insurance is cheaper than whole of life insurance, especially when you are reasonably young and the term doesn't reach out too far into your old age. It is good low cost insurance to cover certain periods in your life when you have the greatest responsibilities.
Whole of Life Insurance
Whole of life insurance is a different proposition altogether and the benefits of the two different types of insurances shouldn't really be discussed as competing types of cover. Whole of life assurance is also as its name suggests – it is assurance taken out for the whole of a person’s life. At some stage the insurance company will have to pay out, it can not be avoided.
If circumstances change and you feel you no longer need the whole of life cover that you had taken out previously you can surrender it. If you do this you will be entitled to a certain payment that represents its cash value. If you should die your beneficiaries will receive your whole of life's stated insurance value. Rather than surrendering your whole of life assurance policy you can also borrow from it.
The argument many put up against taking out a whole of life assurance these days is that you can get a better return for your money if you take out a term life insurance cover at its low rate and invest the difference between that and your whole of life premium in another investment scheme. This may well be true, if you have the capability of doing so, but many a low paid family has benefited from a sound whole of life policy in the past, by receiving the benefits of its breadwinner's cover if his or her life was to be unfortunately cut short, as well as benefiting if the insured person lived to an old age and passed on the proceeds as a legacy. No money can be considered as being wasted with a whole life policy, unlike when a term life insurance policy exceeds its term with the insured person still living.
Is Whole Life Insurance Still Available in Australia?
The debate on which is the better life insurance cover, whole of life insurance, or term life insurance has been well and truly lost to term life insurance in Australia. Where whole of life insurance was once the dominating cover sought by most Australians, the advent of superannuation has finally seen this type of cover being withdrawn from the Australian insurance scene entirely, leaving term life insurance the only life insurance cover now available.
Whole of life insurance wasn't the favoured cover in the past without good reason for this devoted following. It was popular because after a few years it more than paid for itself. It had a cash value of its own, something no other type of insurance offered. A portion of your premium payments went towards investment in the life insurance company itself and this eventually saw an accumulation of funds, which over time built up to a substantial amount of money, enough to cover all premium payments plus more. This was seen as making the insurance virtually cost free.
The cash value of whole of life insurance was an important reason why consumers preferred whole of life insurance to the cheaper term insurance. Although the return on your money invested wasn't great, usually no more than a bank savings account, it was popular, because not many lower paid workers of the time were able to save, let alone invest, in their own right. Whole of life insurance policies therefore became a way to take part in forced savings while at the same time receive a life insurance cover to protect your family and creditors against loss should you die. This protection was for the whole of your life as the name suggests. The premium you started out paying remained the same throughout your life as there was no expiry date.
Variations in Life Insurance Types
There are variations between the two types of life insurance. For instance, the more recent superannuation schemes are a mixture of term insurance and investment, and because it has become mandatory in countries like Australia for all employees to be a member of a superannuation fund the sale of whole of life assurance policies has slowed considerably.
Other countries, particularly the USA have seen the growth of universal life insurance policies. These policies give a permanent life cover as long as the premiums continue to be met. A way around any indecision of what type of policy would best suited to your own situation could be to take out a whole of life policy with an affordable premium and have it topped up with term cover during the years you carry your heaviest responsibilities. In this way you are assured of cover as you age at a reasonable price whereas if you left it to term insurance alone your funeral cover by itself could even become prohibitive in your 70s and 80s.
The same can be done with superannuation. If you feel your death cover built into your superannuation is insufficient, especially if you were to die at a young age while you still had a large proportion of your mortgage outstanding and your kids were still young, you would be wise to bolster it with term cover during your most vulnerable years.
Is Term Life Insurance More Cost Effective?
Whole of life insurance policies are no longer available in Australia. This has mainly come about as a result of superannuation becoming compulsory for all workers, as superannuation comprises an investment of your contributions so that there is sufficient money to retire on, along with a cheap term insurance cover to financially protect your dependants should you die before retirement.
Before superannuation became commonplace most people took out whole of life insurance because of its forced savings component that complimented its life insurance component. Whole of life insurance was dearer than term life insurance but it gave protection against the early death of the insured person and at the same time, built up a cash value in its own right that could be borrowed against. If it was felt the protection was no longer required the policy could be surrendered and the money you had paid in premiums would be returned, plus more, especially after a few years had expired. When you reached old age and the policy had never been surrendered it was always there to pay all your final debts, including your funeral expenses, with sufficient left over to leave a legacy to your loved ones.
Many elderly people today are feeling the loss of not having whole of life insurance to fall back on as when they get into their seventies and beyond, term life insurance, the cover offered as funeral cover, becomes extremely expensive, especially for those on a pension.
Term life insurance is the only life insurance on offer in Australia today and as its name suggests it can only be taken out for specific limited terms. It's an ideal, low cost, way to insure your family against your early death, especially while you are paying off a mortgage and as the family is growing. Term life insurance cover can be taken out in rather large amounts for any number of years such as two, three, five, ten or even into old age but as each term expires and no claim has been made all the premiums paid are forfeited to the insurance company and you are no longer covered. If you still need insurance you have to renew the policy at an increased premium rate because you will have aged in the meantime and your risk of dying will have increased.
The cost effectiveness of term life insurance can be looked at in two ways; it's no doubt cheaper if you look on it as the amount you pay monthly for the level of cover you receive but whole of life insurance costs you nothing at all in the end as the life insurance company has to pay back all the premiums paid plus interest either on your death or if you surrender the policy earlier.