Choosing Term or Permanent Life: A Simple Guide

You may have heard the phrase “Buy term and invest the difference.” That works if you have the discipline for a regular investment program. But for some, a permanent life insurance policy will provide more security and better returns. It also offers tax advantages that other investments lack.

There are two categories of life insurance: term and permanent. Term coverage provides pure death benefit coverage only. Permanent, or cash value, programs provide some additional benefits, including the tax-deferred accumulation of cash.

Term insurance provides financial protection for a specific time (one to 30 years), and gives a death benefit but no cash savings. If you have employer-provided life insurance, it is probably term insurance.

Term Insurance

Term comes in several varieties:

Renewable. Policy owners can renew coverage at the end of their policy term without having to submit new medical information, though the premium rate will generally rise with each renewal.

Convertible. A convertible policy allows the insured to convert term coverage into a permanent policy without providing evidence of insurability (usually a medical exam). A convertible policy costs more, but the premium
remains fixed after conversion.

Level. Level-premium policies have a fixed premium for a certain number of years (usually 10 or 20), while the death benefit remains unchanged. Although the rate locks in for the policy period, it can jump considerably upon renewal.

Permanent Life

Permanent insurance provides lifelong protection and includes a savings element that grows on a tax-deferred basis and may become substantial over time. Premiums are generally higher than for term insurance, but they remain fixed. All permanent insurance has a face value and a cash value. The face amount is the money that will be paid at death, while cash value is the amount of money currently available to the policyholder. Permanent life offers other benefits — purchasers can withdraw some of the cash value, obtain a loan using the cash value as collateral or use the cash value to pay premiums, provided cash value is high enough.

The different types of permanent life policies include:

Whole or ordinary life. The face amount of the policy is fixed, while premiums remain level and must be paid on a regular basis. It offers a death benefit and a savings account, which grows based on insurance company-paid dividends.

Universal or adjustable life. More flexible, insureds can pay premiums at any time, in virtually any amount, and may change the amount of the death benefit, although an increase usually requires a medical examination. After accumulating sufficient funds in the cash value account, insureds can change premium payments, a useful feature if your economic situation suddenly changes.

Variable life. This policy combines death protection with a savings account that a policyholder can invest. The death benefit and cash value vary with the performance of the underlying investments, although some policies guarantee a minimum death benefit.

Variable-universal life. The policyholder has the investment risks and rewards of variable life insurance, coupled with the ability to adjust the premiums and death benefit available under universal life.

Regardless of the type of policy you buy, life insurance beneficiaries usually receive any benefits free of income taxes. This makes life insurance a valuable tool for estate preservation, charitable bequests, paying final expenses, and ensuring your family’s lifestyle doesn’t suffer if a salary earner dies prematurely. For assistance in determining how much and what kind of insurance you need, please contact an Insurance 411 agent.