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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 your beneficiary.

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 premiums)
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 premium dollars
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 the insurance.

Whole Life

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.

Universal Life

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.