Life insurance aims to offer you peace of mind knowing that your loved ones’ financial needs will be met after you die. When buying life insurance, you might have to choose between a permanent policy and term life insurance. Both options have advantages and downsides, which you should know about when buying a life insurance policy.
Term life insurance is typically more affordable than permanent coverage; however, it only lasts for a particular duration or term. On the other hand, permanent life insurance costs more than term life insurance and lasts all your life, provided you keep paying the premiums. Knowing the differences between term life and permanent insurance will help you select the most suitable policy and coverage for your family’s needs.
The Meaning of Term Life Insurance Policy
Term life insurance policies are designed to end after a fixed number of years—commonly 10, 20, or 30 years. Other than selecting the duration of your policy, you are expected to choose the amount of your death benefit. Essentially, it is the value your beneficiaries pay out upon death.
Many professionals advise that you reevaluate your policy about one year before it expires. In this way, you can have sufficient time to study your options. Some insurers will permit you to renew your insurance policy or roll over your term life insurance into a permanent life insurance policy. Also, you can allow your policy to expire, which implies that the policy will expire, free you from paying your premiums, and stop your beneficiaries from receiving any death benefit upon your demise.
Why would anyone opt for life insurance that is set to expire after a fixed period? This is because term life insurance policies are usually more affordable than permanent life ones. Commonly, individuals are likely to want life insurance for a particular duration, preferably when their kids are still young. If you are hesitant about purchasing a policy that will expire, you might be better off with a term life insurance like the return-of-premium option.
The Meaning of Permanent Life Insurance
Permanent life insurance is a life insurance policy that remains in effect throughout your life. You are only required to pay your premiums, and, in most cases, your death benefit will certainly be paid out to your beneficiaries. It is worth noting that permanent life insurance policies are substantially more costly than term life insurance policies. However, permanent life insurance policies are suitable for individuals looking for lifetime coverage.
Unlike term life insurance policies, many permanent life policies are designed with a cash value component. This means that as you pay each premium, that money accrues into an investment or savings account, allowing you to earn interest on that money. The cash value account may increase to a certain point to allow you to pay the insurance premiums using it. In addition, you can take out a loan using the accumulated cash in the account as security.
A Comparison of Term vs Permanent Life Insurance
When determining which policy is suitable for your family or circumstances between term and permanent life insurance, it is best to focus on the duration of the insurance policy and the cash value component attached to the policy.
In most cases, a term life insurance policy is more suitable when you are looking for coverage for a fixed duration, for example, when your kids are still financially dependent on you or when you are retiring from your mortgage loan.
However, permanent life insurance is preferable if you have a lifelong dependent person, like a kid with special needs. In this case, you will need to purchase lifelong coverage.
In addition, a permanent life insurance policy comes with a cash value account that functions like an investment vehicle and is likely to earn you returns. However, you will have to pay higher premiums for this insurance policy. Therefore, you must determine if you prefer to grow your money through the cash value account or if you prefer to invest your money separately from your life insurance policy.
