As a way to reduce risk, life insurance protects you from the bad things that can happen in life. In the beginning, people got life insurance for a certain amount of time. If the insured person died during that time, the beneficiary got the death benefit. The downside was that the coverage was only good for a certain amount of time. This led to the creation of new products that offered coverage for a person's whole life.
In term insurance, the cost of the policy goes up over time because death is more likely. Policies can be renewable, which means that they can be renewed after the period with a higher premium, decreasing, which means that the amount of coverage decreases each year, or convertible, which means that the policy can be changed into a cash value policy after the period. In whole life, the premium stays the same for the whole life of the policy. Most of the time, the premium for whole life is more expensive than that for term.
To pay for the cost of the insurance, the premium for term goes up. So, at first, the premium is lower, and it goes up after that. In whole life insurance, the premium is more than the insurance cost at the start. This extra money is kept as a cash value component and invested to get an annualised return of 5–6%. When the cost is higher than the premium in the later years, money is taken from the returns of the cash value component to pay for the cost.
Since the premium for term insurance is lower, the extra money can be wisely invested elsewhere to get a better return. Whole life insurance has a cash value that can be used to borrow money for other things, like putting children through school. There are a lot of new policies that offer a lot of benefits, like guaranteed returns and dividend payments.
Before choosing between term and whole life insurance, it's important to think about how much money you have and what you want the policy to do. It depends on how old the insured person is, what their future needs will be, and how many people depend on them.
