Life Insurance: Term vs Permanent

Posted June 24, 2013 | Filed under topic Types of Life Insurance Coverage

There are two common types of life insurance that most people purchase: Term and Permanent. Each is designed for a specific purpose, and each offers features that may be more in line with a person’s needs and ability to afford.

Term insurance

Term is the most affordable of the life insurances, and it provides protection only in the event of death. It does not accumulate cash value. The policy will have a face value and a set length of coverage, thus the name Term. Should the insured cease payment, the insurance benefits will also cease.

Permanent Life insurance

This is more of an investment type of policy. It remains active until the policy matures, provided the person continues to pay premiums when due. As the policy accumulates value, the insured can borrow cash from it, or the owner can surrender the policy in exchange for a set amount of money.

There are two types of permanent life insurance that are most familiar with purchasers – Whole Life insurance and Universal Life insurance.

Whole Life insurance

For younger people, the premiums are much higher than for term insurance, but if the policy is maintained until average life expectancy, the insured may borrow against the policy income tax free. Those loans are available until death, with the amount of those loans deducted from the death benefit should the insured die.

The advantages of Whole Life insurance are guaranteed death benefits and cash values, fixed annual premiums and mortality and expense charges that will not reduce the policy’s cash value. The disadvantages include the infelicity of premiums and the fact that there are other ways of saving money that accumulate at a much greater rate.

Universal Life insurance

These policies come with greater payment and benefit flexibilities. Cash values increase with premiums paid, but those values also decrease with the actual cost of the insurance and fees charged by the insurer.

So, while Universal Life is designed to solve the two major flexibility problems of Whole Life, that flexibility does come at a cost to the insured.

While this serves as a general overview of the primary life insurances, it is best to sit down with an agent and determine which is best for your particular circumstances.

Term and Whole Life policies have been around the longest while Universal Life and other types of policies are relatively new. Other types include Limited Pay, Endowments, Accidental Death, Group Life, and more.

It is important to sit down with an agent and determine what policy best fits your needs and is most affordable for you. Today, most agents offer a full range of life insurance products, one of which will best fit your needs.