Term versus Permanent Life Insurance
What’s the main difference between Term life insurance and Permanent life insurance?
- Term life insurance covers the insured if he or she dies with the given time period of the policy. The value of the policy is only in its stated face value, which is the amount of money paid out upon the death of the insured. There is no cash value to the policy itself.
- Permanent life insurance is intended to be lifelong; it provides a death benefit payout, and it also allows the insured to earn dividends on part of the insured’s premiums paid to the insurance company. So permanent life insurance has a cash value as well as a death benefit.
Some Specific Advantages and Disadvantages
Check out the advantages and disadvantages associated with the usual types of term and permanent life insurance policies. Take a look at how some types of permanent life insurance differ, such as Whole life, Variable life, Universal life, and Variable Universal life.
But be aware that insurance companies offer different programs that include features such as extra accidental death coverages, increasing or decreasing payment plans, lump sum payment plans, surrender clauses for turning in one’s permanent life insurance policy, and so on.
Term Life
Advantages:
- the policy is usually simple and easy to understand
- the cost is usually less
- for most policies, the premium you pay is fixed and doesn’t change
- your beneficiaries receive the full face-value death benefit
Disadvantages:
- there is no cash value
- the policy ends on a certain date
- all premiums may be retained by the insurance company if the insured outlives the end-date
- when the policy ends, it may cost more to renew because of age and health issues
Permanent Life Insurance
Compared to Term
Advantages:
- the policy extends for one’s whole life
- the policy cannot be cancelled unless you default on payments
- the insurance company invests at least part of the premium you pay and sets up one or more cash accounts on which you may earn interest/dividends
- benefits may then include a death benefit and part of the cash value of your account(s)
Disadvantages:
- permanent life policies are often more expensive
- different permanent life policies may seem confusing
- not all permanent policies guarantee the amount of the death benefit
What are some differences among the types of permanent life insurance?
Whole life
- your premium usually does not change
- you have a fixed death benefit
- the company invests your money and sets up a cash-value account
- the company may pay you dividends from the account during your lifetime
- the rate of return on your investment account is often low but guaranteed
Universal
- you usually decide on the amount you want to invest above the minimum premium
- you pick when your premiums are due, how much above a minimum you pay, and what part goes toward your death benefit vs your cash value
- the company decides how your money will be invested—usually mortgages and bonds—and share the information with you
- the investment earnings go into a cash-value account that you can allow to grow or use to help pay premiums
- beneficiaries receive the death benefit, or face-value stated in the policy, and in some cases, most of the cash account
Variable
- premiums are usually fixed
- the company decides on investments but offers both low- and high-risk possibilities, such as stock funds
- the investment earnings go into a cash-value account that you can allow to grow or use to help pay premiums
- the death benefit may vary based on the investments
- beneficiaries may receive most of the cash account
Universal Variable
- your premiums and death benefit are flexible
- you decide how your money will be invested
- the death benefit and cash value are based at least partially on the success of your investments, not on a face value stated in the policy
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