||Term vs Whole Life Insurance
Term vs Permanent (Universal and Whole Life) Life Insurance
Term vs. Permanent Life Insurance
An analogy that can be made between term and permanent life insurance is
like comparing leasing an apartment to purchasing a new home. Buying term
insurance would be like leasing an apartment and purchasing permanent life
insurance would be like buying a new home. Even though one may conclude that
purchasing would be better than leasing, when it comes to life insurance
there isn’t one that is better than the other. It all depends on your needs
and plans for what you want the insurance to provide for. For many
individuals having a combination of the two makes the most sense.
Term life insurance will pay the death benefit to the beneficiary upon
the death of the insured. Term insurance is a cost effective way to get the
life insurance coverage you need for a specified period of time such as 5,
10, 15, 20, 25, or 30 years. There is no cash value in Term life insurance
policies. This is the most common type of life insurance purchased because
it is inexpensive, easy to understand, and there are little if any
contractual provisions that are different between each company’s policy.
Term Insurance Features
When dealing with life insurance basics, a logical place to begin is with
term insurance. Some of the basic provisions of term insurance that
differentiate this type of life insurance from permanent life insurance are:
- Provides temporary coverage for a specified period of time (5 years
to 30 years).
- A death benefit is paid only if the insured dies during the
specified term of the policy.
- No cash values accumulate during the policy term.
- Most can be converted to a permanent policy without medical
qualification during the conversion period.
When is term insurance right for you?
Term insurance can be used when you have a temporary need for coverage and
you need a large amount of insurance for a modest initial cash outlay. Term
insurance would also be appropriate if you wish to guarantee your future
insurability, wish to buy term and nothing else, or want to use it in
combination with a permanent policy to provide a maximum death benefit for
There are a few different types of permanent life insurance. The three main
types are Whole life, Universal life, and Variable Universal life. Permanent
life insurance is more expensive than term insurance because it has a cash
value component that grows tax deferred inside the policy.
Basic Permanent Insurance Features
- Permanent life insurance, like term, has some specific provisions.
- Provides coverage for as long as premiums are paid, or as long as
there is sufficient cash value within the policy to pay for itself.
- Level, guaranteed premiums. (Universal life policies have flexible
- The ability borrow or withdraw from your policy, usually not though
until the policy has been in force for a few years.
- In the early years of a permanent policy, the majority of the
are used to help generate cash values so that the premium will stay
level in later years, as you get older.
If there is sufficient cash value within the policy it can be used to pay
future premiums, unlike in term where once premium payments cease, so does
Whole life insurance is the most conservative type of the three. The
investment feature in whole life insurance is tied up within the company’s
own investments. If the insurance company’s investments perform well then
the policy will pay a higher rate of return or dividend.
This kind of permanent insurance is typically the most expensive but gives
you the option to have it contractually paid up after a certain number of
years. With most companies it will be around 12-16 years. Again though, it
all depends on the company’s own financial success, so make sure you are
with a proven and solid company.
The investment feature in a Universal life insurance policy has a minimum
rate of return and is generated by interest rates. Aside from the insurance
itself the investment portion of the policy is similar in many ways to a
normal savings account at a bank. In markets where interest rates are high,
they perform well and in times where rates are low they do not.
Unlike whole life insurance, universal life insurance policies have flexible
premiums. As long as there is sufficient cash value to pay monthly
deductions, including cost of insurance charges, the policy stays in force.
The monthly cost of insurance charges typically increase each year.
The cost for Universal life is a bit less than whole life but you should
expect to pay into this policy for a number of years before you have any
substantial cash value. The one benefit though that these policies have in
comparison to whole life is that the flexible premiums give you the ability
to pay more or less into the policy, within certain limits.
Variable Universal life
Variable universal life insurance is similar to universal life but the cash
value portion is invested in mutual funds and performs however well the
particular funds you can choose from do. You have the ability to be an
aggressive or conservative investor within your own policy.
Like universal life, VUL policies give you the flexibility to pay more into
the policy to help accrue cash values quicker, within certain limits and
also the ability to pay less if you need to.
When is permanent insurance right for you?
Permanent insurance will make sense if you have a long-term need and can
afford to pay for the permanent coverage. With term it only stays level for
the specified term length you elect (i.e. 5, 10, 15 years etc.). It will
also make sense if you need to diversify your investments into tax-favored
programs. The cash values accrue tax deferred and can be used to help
supplement retirement income, education expenses or any other future need.
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