Term vs. Permanent Life Insurance

Filed Under: Life Insurance

The two main categories of life insurance are term and permanent life insurance.

Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.

You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.

A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)

Once you receive a quote for a term life policy, you make level premium payments for the term of the policy. If you die before the end of the term, your beneficiary receives a death benefit. With term life insurance, your policy lapses if you stop paying premiums.

When the policy term ends, you generally have the option to renew, but at a higher premium. A higher premium reflects a greater likelihood of your death during the renewal term. (You're older, after all.) Insurers like to say that your mortality risk is higher, justifying the higher premiums.

Permanent life insurance is different from term life insurance. For one, permanent life insurance provides coverage until you, the policyholder, die. You may cancel, or surrender, a permanent life policy but will likely have to pay a surrender charge. Surrender charges are like paying a back-end load when you sell shares of a mutual fundit lowers the investment performance of the policy.

A second major distinction of permanent life insurance is that your policy builds up a cash value. Cash value is also called cash surrender value (CSV). This buildup in cash value occurs because you invest a part of your permanent life premiums.

How these premiums are invested is what determines what type of permanent life insurance you have. The most common types are whole life, universal life, and variable life insurance.

For example, you may pay $1,000 in premiums over a 12-month period. If the premiums are invested and increase in value, the future premium necessary to keep your policy active may drop to, say, $500. As a result, your premiums accumulate a cash value of $500 after the first year.

Your cash value is the amount you are entitled to if you cancel your policy. With some types of permanent life insurance, you can use the cash value in your policy to adjust either your death benefit or premiums. Alternatively, if the cash value of your policy declines, your death benefit may also decline.

Cash value is a personal asset. You should include this asset when you prepare a statement of your personal net worth. When you apply for a loan, for example, you should disclose the cash value of an insurance policy as a personal asset. You can also use the cash value of an insurance policy as collateral for a loan request.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

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AmericanGirl0232 10:14:26 AM May 22 2008

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Yes CiCi. I so have heard that, great advice.My father gave me the same info!!

JESprinkle33 09:18:40 AM Mar 08 2008

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Why does everyone think you have to choose between term or permanent. The smart thing to do is buy both. Term is cheap while you are young and you can have a big poicy in your early years to cover all your debts and cover any financial loss due to premature death. but also while your young take out some permanent insurance that will always be there to cover your final expense. Also take insurance out on your kids. This will cover them in case of premature death and give them insurability when they get older. And yes it does give them insurability no matter what kind of health problems they may have. If we knew the time when we was going to die then yes you could decide between term and permanent but we don't so this is why it is smart to have both.

RichKofC 08:02:18 AM Mar 08 2008

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I have been in the life insurance profession for almost 18 years most people that state buy term and invest the difference rarely invest enough. Also if you ask those term people that out live the term rarely do they say I am glad I have no life insurance. My advice is own and keep permanent life insurance.

PIPETSA 03:59:07 PM Mar 04 2008

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IF ANYONE WANTS TO BE TAKEN SERIOUSLY, CHECK YOUR SPELLING WHEN SENDING A COMMENT.

PJC0151 01:15:20 PM Mar 02 2008

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To all that read , First in full disclousure I have been a financial planner for 17 years . This argument is as old as the wheel , Life Insurance is the easiest financial product of them all to pick , because you can mathamatically prove using simple math what type , What amount ect, And Absoulutley not get taken ADVANTAGE of, Everything in this blog Is WRONG or minipulated, And is not a fact it is a opinion, All LIFE Insurance is Mathamatically provable, I stake 17 years of Experiance on that , To the Consumer dont be STUPID. I can prove it for FREE. Sincerly P.C, I can be reached at pjc0151@aol.com it I Urge you to give it a shot. Last but not least You the Consumer Truly have a Financial product that you cant Get Ripped of on. Because any Agent Worth His or Her Salt can do it if they Cant email me for a free second opinion. AGAIN IT AS EASY AS 2 2 =4 or 3x3= 9. Hope to here from you P.C EMAIL at pjc0151@aol.com Stop being Lab Expearaments And goood luck from Pittsburgh,PA

BFLISS 08:54:31 PM Feb 28 2008

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Permanent Life insurance such as a variable life or a equity index universal life can be used as a investment vechicle in which the cash buildup inside the policy grows tax deferred. In later years, particularly during retirement, the cash can be taken out as loans thus creating a tax free income stream while still maintaining a marginal death benefit.

Laureenwilcox 09:37:16 AM Feb 26 2008

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Dido WFML......The people who say buy term and invest the difference don't see the mess they make of peoples finances when it really..... matters.

WFML 09:30:11 AM Feb 26 2008

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Don't you love poeple that know whats best for everyone else? Ask some 60 and 70 year olds that have tried the Buy Term concept how it's worked for them. If you are young enough and have the disipline to save the money without spending it. Term insurance gets expensive as you get older, A Life Insurance death benefit passes to you heirs tax free, you savings may not. Each person should consider whats best for hem rather than place too much value on a self promited "expert" that doesn't know you or what your circumstances are

CiCiHaigh 08:35:52 AM Feb 26 2008

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This information sounds as if it is in favor of Permanent Life or Whole life insurance. It in incorrect. Why would you want an insurance company to invest your money for you and keep a part of YOUR earnings? Buy term and invest the difference yourself. YOU control the money! And the insurance is ALOT cheaper!!

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