Term Life Insurance is also known as temporary life insurance because coverage lasts for a set
period of time. Depending on the legislation, this period, known as the term,
can extend anywhere from 10 to 30 years or to a particular age. The premiums
are level, which means they will not fluctuate during the insurance period. But
insurance premiums also increase with age.
Permanent Life Policies generally provide
lifelong coverage and the opportunity to build cash value, which accumulates on
a tax-deferred basis. You can access into the policy’s cash value while you’re
alive. The coverage length, cash value and policy charges are why permanent
life insurance is more expensive than term life. You can receive the cash value
of the account if you cancel or surrender the policy at any time, but you may
be required to pay a surrender fee, if applicable.
Term Life Insurance is also known as temporary life insurance because coverage lasts for a set
period of time. This period, called the term, can last anywhere from 10,20 or
30 years or to a specific age, depending on the policy. Premiums are level,
meaning they won’t change during the policy term. But premiums also become more
expensive with age.
Permanent Life Insurance: Policies generally provide lifelong coverage and the opportunity to build cash value, which accumulates on a tax-deferred basis. You can tap into the policy’s cash value while you’re alive. The coverage length, cash value and policy charges are why permanent life insurance is more expensive than term life. If you decide to cancel or surrender the policy at any time, you can receive the cash value of the account but may have to pay a surrender charge, if there is one.
Cash Value: Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash-value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries. Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you’re using the policy’s cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash-surrender value. If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of death benefit protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.
Whole Life: Whole life insurance, also known as traditional life insurance, provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate.
Interest is based on dividends and are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year – but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.
Variable Life: Variable Life insurance is offered via a prospectus and provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate your premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds, combinations of both, or a fixed account that guarantees interest and principal.
This type of insurance is for people who are willing to assume investment risk to try to achieve greater returns. With Variable Life you’re shifting much of the investment risk from the insurance company to yourself. Good investment performance would provide the potential for higher cash values and ultimate death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.
Indexed Universal Life: policies can help you to build wealth while leaving behind a death benefit for your loved ones. These policies put a portion of the policyholder’s premium payments toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted. On a monthly or annual basis, the cash value is credited with interest based on increases in an equity index.
The cash value portion of your policy earns interest based on the performance of an underlying stock market index with the downside protection through minimum guarantees to ensure that your cash value does not decline due to decrease in the index. For example, returns linked to Standard & Poor’s (S&P) 500 composite price index, which tracks the movements of the 500 largest U.S. companies by market capitalization. As the index moves up or down, so does the rate of return on the cash value component of your policy.
The benefits of term life insurance are:
Affordability: Term life insurance only offers a death benefit, which is the cash paid to your beneficiaries if you pass away during the term. It does not include a savings benefit like permanent life insurance. This makes it the most economical type of life insurance policy, at least initially. Many people are pleasantly surprised to learn just how affordable term life insurance can be. As an example, a healthy 30-year-old can get a $500,000 20-year level term policy for about $30 a month.
Flexible Payment and Policy Option: Term insurance provides numerous payment and coverage alternatives. You have the option of paying your premiums monthly, quarterly, semiannually, or annually. Most life insurance charge a processing fee if you don't pay annually, so an annual payment could save you money. You can also decide whether you need coverage for one year or thirty. The most usual terms range from five to thirty years in length, with increments of five years.
Simplicity: For many people, term life insurance is a simple, affordable way to safeguard the financial health of loved ones if something happens to them. Plus, it’s easy to understand, which makes it simple to shop for. As long as you pay the premium, you’re covered for the duration of the policy. You need to make only three main decisions: how much life insurance coverage you need how long you want the coverage to last and which insurer you want to do business with. Once you’ve made those choices, compare life insurance quotes to get the right coverage for you and your family.
Term Life Insurance: As the name implies, term insurance provides protection for a specific period of time and generally pays a benefit only if you die during the “term.” Term periods typically range from one year to 30 years, with 20 years being the most common term.
Advantages: On average, life insurance rates are more affordable for term than whole life insurance because term policies offer coverage for a predetermined time. If you outlive the term and the policy expires, your beneficiaries don’t receive the death benefit, so it’s less of a risk to the insurer.
No Cash Value: Term life is typically less expensive than a permanent whole life policy – but unlike permanent life insurance, term policies have no cash value, no payout after the term expires, and no value other than a death benefit. To keep things simple, most term policies are “level premium” – your monthly premium stays the same for the entire term of the policy
Convertibility: If the policyholder decides to make the conversion on their convertible insurance, the permanent policy will have the same value as the term policy, but the permanent policy will have higher premiums. Even before conversion, convertible insurance will be more expensive than a term life insurance policy for the same amount of coverage, because there is a built-in cost for the option of being able to make the conversion without a medical exam.
Example: Immediately after getting her first job, River purchased a $100,000 convertible term life insurance policy for 30 years and has the option to convert part of or the entire policy into a whole life insurance policy before the age of 50.
After marriage and kids, at the age of 40, River rethinks the approach to life insurance and decides to convert her term policy to whole life insurance. The premium amounts increase, but there is a cash value component to withdraw even as the policy provides for her beneficiaries after death.
In addition to a death benefit, permanent life insurance has several features that term life insurance does not. The benefits of permanent life insurance include:
Lifelong coverage. As its name implies, permanent life insurance covers you for life, as long as you pay your premiums. Many people gain peace of mind knowing they will always be having coverage in place.
Living benefits. A benefit of permanent life insurance is that they can build cash value over time, which accumulates on a tax-deferred basis just like assets in most retirement and tuition savings plans. The money can be used in the future for any purpose, including important milestones such as a down payment on a home, college tuition or retirement. (Just know that withdrawing cash value from the policy will reduce the death benefit if you don’t pay it back.)
Many options. There are different kinds of permanent life insurance. Some offer a guaranteed rate of return while others let you choose a mix of investments for a variable rate of return. Meanwhile, some require you to pay fixed premiums while others let you vary the amount based on your financial circumstances. Others even let you skip premium payments and increase or decrease your coverage level over time.
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