When you’re researching life insurance, you’re likely to come across a myriad of different types of policies. There’s term life and permanent life insurance, such as, whole, variable, and universal. What does it all mean? While any life insurance policy will pay a death benefit if you die during the time the policy is in effect, there are big differences, particularly between term life insurance and permanent life insurance.
Term life insurance pays a death benefit if you die during the term specified in your policy, while permanent life insurance covers your entire life, and includes a cash value component in addition to a death benefit. Permanent life insurance is generally a more robust and flexible component of a long-term financial plan.
Comparing term vs. permanent life insurance
With term life insurance, there's a possibility that your policy will never pay a death benefit, because the term might expire before you die. And term life insurance does not build cash value. These two things together mean that term life insurance is usually available for a lower premium.
Permanent life insurance has features that term life insurance doesn't include, such as a lifetime death benefit that will be paid someday (as long as you keep your policy in place). Permanent life insurance also builds cash value that you can use during your lifetime*. Some companies also pay dividends, which can add to the growth of your policy over time. The additional benefits that come with permanent life insurance mean that premiums are generally higher than those for term life insurance.
Term life insurance is usually best for you when you need a large death benefit for a situation that will end someday, and when budget is also concern. For example, if you have young children, you might choose a term that covers the time until they have completed their educations and started their careers.
Types of term life insurance
Although all term life insurance lasts for a specified time period, there are different types of term life policies to consider.
Level term life insurance
With level term life insurance, the premium stays the same for the entire length of the policy. You choose a term that works for your personal financial situation, and you can plan out your budget knowing the premiums won't change during the term of the policy. If you expect your income to grow, the premiums will become more affordable over time, as a fixed premium becomes a smaller part of your budget when your income is rising.
Annually renewable term life insurance
Unlike level term life insurance, annually renewable term life has premiums that increase over time.
When you’re young, annually renewable term tends to be the most affordable type of policy but as you reach the end of the contract duration, the premiums become more expensive. This type of policy is often best when you will need insurance for a long time because it gives you the most security and flexibility in your coverage options.
Types of permanent life insurance
Permanent life insurance gives you lifelong coverage and a cash value that can grow over the years. However, there are differences in the types of permanent policies you can choose.
Whole life insurance
With whole life insurance, the cash value component grows at a set rate that is determined by your insurance company. The cash value in whole life insurance is guaranteed^ to grow over time and is not affected by the markets. Your premiums will also remain the same for the life of the policy. Death benefit and cash value can grow more quickly through dividends.
Universal life insurance
Universal life insurance is more flexible than whole life insurance, and may be a good choice for someone with more sophisticated financial needs. With universal life, you have flexibility to adjust the amount of your premiums (within certain limits) and your death benefit. This can be particularly beneficial for someone who has uneven income.
Variable life insurance+
If you're looking for the type of permanent life insurance that offers the most flexibility in how your cash value is invested, variable life insurance may be a good option. Variable life insurance gives you the ability to choose investment options for your cash value. These options include funds that give you market exposure, which can help your cash value grow more quickly, but like any market-based investment, the value can also decrease.
Term vs. permanent life insurance: what is best for you?
When you're considering whether term life insurance or permanent life insurance is best, consider how each type of policy fits into your overall financial plan.
If you decide to start with term life insurance, but you think you may want permanent life insurance at a later time, it's possible to apply for a policy that gives you the option of converting from term life to permanent life insurance, with no additional medical exam required. And it’s not an all-or-nothing option. Many people get a mix of term and permanent insurance in order to get a large death benefit while still taking advantage of the additional benefits that permanent insurance offers.
A financial advisor can help you evaluate which features work best to support your financial goals.
*Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.
^Guarantees are backed solely by the claims-paying ability of the insurer.
+The underlying investment options are subject to market risk, including loss of principal, and are not guaranteed. No investment strategy can guarantee a profit or protect against a loss.
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