Both types of life insurance payout in the event of the insured's death, but each one is applied to different needs. It is not unusual for a person to have one whole life insurance policy and one or more term life policies that are meant to handle specific financial obligations. Whole life insurance policies are often open to policyholder participation, another difference between it and term life insurance. Where price is concerned, term life policies tend to be less expensive, mainly because there is no guarantee of a payout for this type of policy.
Whole life insurance policies do not expire as long as the premiums are paid. At the death of the insured, the policy pays a full cash value to the beneficiaries listed in the policy. During the life of the insured, the policy acts much like a tax-free savings and personal loan account, where the funds can be invested at the policyholder's discretion, or the current value of the policy borrowed against. Because of the investment aspects, this type of insurance policy has the possibility of being highly profitable or becoming a total loss, and care should be taken when manipulating the funds.
Term life insurance is only effective for a specific number of years, called the term. If the insured survives beyond the term of the policy, it can either be renewed at a higher premium rate or allowed to cancel. Another type of term life insurance is called a decreasing term life policy and is specifically designed for things such as a mortgage, where the account balance decreases over time. The rates are usually lower than a regular term life policy and are fixed across the entire term of the policy.