Term vs. Permanent Life Insurance: Which is Better?
If you are thinking of purchasing life insurance coverage for yourself or your family, it is important to determine which available option will work best for you. Failure to do so can be costly as making the wrong investment will result in little or no reward. There are many types of life insurance policies available today, which can be summarized into two main types: term and permanent life insurance.
Term Life Insurance
One can buy a term life insurance policy of 1, 10, 15, 20, or 30 years. These policies are said to expire once their term runs out. For example, if you buy a one-year term policy, it would be cancelled once a full year elapses. Once the policy expires, no further payment of premiums needs to be made. The carrier will also not make any payout to a beneficiary if the previously insured policyholder dies.
A term life insurance only has death benefits. It is therefore a basic coverage that happens to be the cheapest among all other life insurance policies. The death benefit, which is the face amount of the policy, is only given to a beneficiary once the policyholder has passed away.
A term life insurance is basically taken to cover a particular life situation at a specific cost. If you are below 50 years old and are in good health, you are highly likely to get competitive term policy premiums, because according to statistics, anyone below the age of 50 is less likely to die if they are generally in good health. Since you present lower risk levels, many carriers will be willing to lower the cost of their term policy premiums. However, if you are above 50 years old, you will most likely pay higher premiums, with the possibility of not qualifying for a term insurance one you reach age 65 or above.
Permanent Life Insurance
As the name implies, this type of life insurance is permanent. It will cover you throughout your lifetime as long as the premiums are fully paid. Permanent life insurance policies only cease to be active if the insured party dies or the payment of premiums stops. Even though a permanent life insurance is paid after the death of its policyholder, it operates quite differently from a term insurance. This is mainly because part of the monthly premiums is channeled into a particular investment vehicle, such as bonds or shares, that you can choose together with your carrier. The invested or saved portion is commonly known as "cash value".
This cash value therefore acts as a savings asset, which you can borrow to cater for an urgent need and pay back with interest. You can also claim these savings if your insurance policy expires and you are still alive. This cash value is what makes permanent life insurance premiums expensive; they are usually five to ten times larger than those of term insurance policies. The main benefits of a permanent policy are placement and cost certainty and the cash value attached to it.
However, the cash value tends to be very low during the early stages of the policy, since a big percentage of the initial premiums are used to pay the agent's commissions and sales charges. With time, the cash value grows depending on how much interest or dividends the carrier pays the policyholder.
Term vs. Permanent Life Insurance: Which is the Better Option?
While a term policy only offers life coverage that is paid out following the death of the insured party, a permanent policy offers both life coverage and an investment opportunity (cash value). However, permanent life insurance policies are more expensive and tend to have hidden charges and commissions. These extra costs would be worthwhile if the policy was a good and rewarding investment vehicle. Sadly, it is not. The truth is that you have a higher chance of quickly accumulating the extra money yourself through different investment vehicles than you do if you let the policy carrier do it for you through permanent life insurance coverage. You will also have full control of your investment, and you will not need to borrow it when you need it, as is the case in a permanent policy.
The alternative cheaper option to life insurance coverage is therefore a term policy. This is particularly the case if you are healthy and under the age of 50. Parents with young children can therefore take up a term policy until their children are grown up and able to take care of themselves. After this, there will be little to no need for a term policy, since the children will not be dependent on their parents' income. After retirement, you can live off your social security, investments, or pensions and further invest any extra money or take up different life insurance policies.
When to Take a Permanent Life Insurance Policy
Permanent life insurance policies are most attractive in a highly taxed environment. This is because as a percentage of the premium is used to maintain the insurance, which will pay out as a death benefit, while another percentage acts as a cash value saving from the policy. This saving can build up without tax being paid on it. As the investment grows, you can borrow loans from it, which you do not have to pay back. When you pass away, the loan will simply be deducted from the death benefit.