The Difference Between Permanent and Term Life Insurance

An often asked question is “What type of life insurance is best?” The answer: it depends. There are different types of life insurance, like there are different types of ice cream, and every person has their own preference on flavor.

Term Life Insurance

Term insurance is life insurance in its purest form. You pay a premium and are covered for the term of your policy. The term can be anywhere from one year to over 30 years. After the term is up, you may be able to keep the policy, but the price will increase. Policies with a shorter term are usually cheaper, but the price will jump sooner. Longer term policies start off higher, but the price is locked in for a longer time. Though the cost of term insurance starts low, it will ultimately become too expensive to keep. Term insurance is good for people that want lots of coverage for the best price, for a certain term of time, are in good health, and are young.

Whole Life Insurance

Whole life insurance is exactly what it sounds like, insurance designed to last your whole life. While it usually starts out much more expensive, the cost is also usually locked in for life, and will not increase. Whole life insurance also has the added benefit of accumulating cash value. Whole life policies start building cash value in addition to the basic coverage after the policy has been in effect for a few years. The growth of the cash value is based on contractual promises, the financial strength of the insuring company, and the performance of the company. This cash value can be added to the total death benefit or can be taken as cash on an annual basis. If the policy is structured correctly, the cash value could also be used as a retirement supplement, by offering tax-free income to the insured.

Universal Life Insurance

Universal life insurance is similar to whole life plans, with one big difference. Instead of being tied to the insuring company’s performance, the cash value in universal life insurance policies are tied to an external factor. A common type of policy is tied to interest rates. These policies were very popular in the 1980’s when interest rates were high, but not so popular today. Another type of universal life insurance is called variable universal life insurance. These policies are tied to securities, like stocks, bonds, and mutual funds. The insured gets to pick what security funds they would like to use to drive their cash value. Cash value in variable universal policies, like normal securities, can go up and down. Universal life insurance is good for people that want to have long term coverage and who want the greater risk and possible reward associated with securities and interest rates.

Group Life Insurance

Group life insurance is supplied to you through some sort of organization that you belong to, typically it is supplied by employers. Group life insurance is similar to term coverage in that it only lasts for a certain term, typically as long as you are a part of that group, i.e. employed at your job. This type of plan is typically very inexpensive and is often paid for by your employer. However, it also usually is not enough coverage. A common group insurance policy will have enough coverage to cover one or two year’s worth of your salary. For your family to survive longer than a year or two, you’ll need a more robust plan that you purchase yourself.

Which one is right for you?

So which policy is best? It depends! The best thing you can do is talk to an experienced, licensed insurance agent to get their recommendation for your specific situation. A good rule of thumb is to have a “for now” policy and a “for later” policy. That means to have a large amount of coverage in term insurance while you may have younger children and financial responsibilities, and a smaller whole life or universal life policy for later when your children are gone, and your debts are paid off. What’s more important is how much coverage you need.

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