The Difference between Term and Permanent Life Insurance

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The Difference between Term and Permanent Life Insurance
by Mike Rowan, eRollover.com

Many people ask me, “What is the difference in Term and Permanent Life Insurance?” So, I thought that I would write a quick excerpt explaining the basic differences between the 2 plans. Please keep in mind, each individual should review their own situation before committing to any life insurance plan. We encourage you to consult an advisor before deciding on a policy.

Term Life

Term life insurance is typically the least expensive type of coverage, at least initially, and the simplest. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time, usually one to 30 years, and typically may be renewed after the initial term. The policy pays your beneficiary a fixed death benefit if you die while the policy is in force. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.

This type of insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.

Permanent life insurance includes whole life, universal life and variable life insurance.

• Whole life provides protection as well as a guaranteed cash value. The premiums remain at a fixed level for the duration of the policy. Over time, the policy generally builds up cash value on a tax-deferred basis. Some companies pay a dividend , which is a return of excess premiums.

• Universal life insurance is a flexible life insurance plan. These policies are interest-sensitive and give the owner the option to adjust the death benefit and/or premium payments, within limits, to fit the owner’s situation. The net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. As with whole life insurance, the cash value belongs to the policy owner, who may withdraw it or borrow against it as provided for in the policy.

• Variable life insurance is a life insurance policy that is based on the performance of the financial markets. The policy offers several professionally managed investment options and the policy owner decides how the net policy values are to be invested. The values may accumulate more rapidly than with other cash value policies, but the policy owner incurs additional risk. If market performance is poor, the death benefit may decrease, and/or the policy owner may have to pay higher premiums to keep the policy in effect. As with whole life and universal life policies, policy owners may borrow against or withdraw the cash value at anytime. Loans and withdrawals may reduce cash values and the death benefit.

Always read your policy carefully for any possible charges associated with these transactions. Variable life insurance policies are sold by prospectus, a valuable disclosure document, that should be read carefully.

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