Financial planning and legacy planning can benefit from life insurance policies. Term principal types of life insurance and permanent life insurance (also known as whole life insurance) are the two most common types of coverage you will find when shopping around. Understand the fundamental differences between these two types of insurance before making coverage decisions based on your needs and goals.
Group products can differ from individual products, especially if they cover a large group under a single policy such as employee benefits. We will focus on products that are typically sold to individuals in the following information.
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Life insurance term: what is it?
Life insurance policies with a term length of 1, 5, 10, or even 30 years are termed term life insurance policies. Hence the name-the policy expires when that particular period ends, so if the insured dies within that period, the insurer will pay out. It may be possible to renew coverage, but the premiums may be higher if the insured person outlives the initial policy period.
Here is a description of how term life insurance works
Most people find term life insurance to be the easiest and most straightforward form of life insurance. The death benefit can substitute for income lost during a specified period, such as until a minor child reaches adulthood. It can also be used to eliminate large debts, such as mortgages, so that surviving spouses and other heirs don’t have to worry about them.
Term life insurance does not have a cash value. When exploring life insurance options, cash value is often mentioned. Your premiums go towards your payout, resulting in lower costs for policyholders than with permanent life insurance. The return of premium feature allows some insurers to refund part of the premiums you paid if no claim is filed before the coverage term is over. The upfront cost of term life insurance can be higher than the cost of standard life insurance.
A level-term life is possible as well as a decreasing-term life.
- Throughout the term of a level-term life insurance policy, the death benefit remains the same.
- The death benefit of term life insurance can be reduced over time, usually one year at a time, by reducing the term.
Find out more about the types of term life insurance.
Permanent life insurance: how does it work?
Permanent life insurance covers the insured person throughout their entire lives as long as premium payments are made on time. Unlike term life policies, cash value may be accessible to policyholders or heirs under certain conditions. This can result in higher premiums for permanent life insurance. A whole life policy can consist of a traditional policy, a universal policy, a variable policy, or a variable-universal policy.
What is the concept of “cash value”?
Premiums went toward insuring you, policy fees, and building cash value when you purchased permanent life insurance. During the term of a traditional whole-life policy, both the death benefit and premium remain the same (level). If you live beyond 80 years of age, your insurance costs can rise significantly.
Life insurance would become unaffordable for many older people if the premiums increased each year. Instead, the insurer charges a higher premium throughout the period of coverage than is needed to pay out claims when the policy is first issued. In order to defer the cost of insurance for older policyholders, the company invests this money and uses it as needed to supplement the level premium.
When these “overpayments” reach a certain amount, they become available to the policyholder as the cash value in a savings account. The cash value can be withdrawn or lent under certain conditions. Generally, cash value remains with the insurance company upon death as a living benefit. Lending against the cash value may reduce the death benefit.
How do I choose between term life and permanent life?
In general, whole life insurance offers coverage throughout your whole life at a higher price than term life insurance. For the same amount of money, term life insurance may provide a smaller death benefit. As a whole-life policy owner, you are likely to prioritize certain features that are important to your individual financial goals, including the ability to plan for predictable benefits and premiums and the ability to grow your savings tax-deferred.