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Compare and Contrast: Term vs. Permanent

When faced with the wide range of life insurance coverage available, you may wonder what coverage really fits your needs now, and what you should plan for in the future. A good first step is to look at two basic types of coverage—permanent (sometimes referred to as cash value) and term life insurance.

Permanent Life Insurance — Cash Value for Your Dollar

Permanent life insurance helps provide not only security from financial hardships in the case of death, but also a “living” savings vehicle for the policyholder.

Premium payments first pay the cost of pure insurance coverage (the expenses and mortality factors of the insurance company), and then the insurance company invests the “leftover” dollars to build the cash value of the policy. Cash value insurance links insurance protection with savings because every dollar invested contributes to the combined program.

Traditional Life Insurance

Many insurance companies provide policyholders with dividends that are paid annually. These dividends are the result of lower expenses and mortality rates, and higher investment returns than were predicted when premiums were set.

Premium levels payable on permanent insurance are contractually guaranteed and will not change (as long as premiums are paid in accordance with the schedule set forth in the policy). Payments may continue for a predetermined period chosen by the policyholder, typically ranging anywhere from ten years to age 100. The length of the payment period and the amount of coverage will, of course, affect the amount of the premium.

Permanent life insurance protection is guaranteed. As long as premium payments are paid, the insured is guaranteed coverage for life, in accordance with the terms of the policy. Evidence of insurability will never be necessary, as long as the original policy remains in force.

Another permanent life insurance feature to consider is its value as a “creditor.” Funds may be borrowed against the cash value of the policy at a predetermined loan interest rate. Loan approval comes from the insurer, but it is generally routine. No repayment schedule is set beyond regular payment of interest on the loan, with outstanding loan balances deducted from the death benefit in the event of the insured’s death.

Term Insurance — Pure Protection for Your Dollar

In a pure term insurance policy, there are three basics to consider: limited period of protection (for a specified term); no cash value build-up; and lower premiums. Nonrenewable, nonconvertible term insurance for one, five, or ten years may provide the lowest cost protection available, and its cost may be its most beneficial feature. Premiums increase over the period of protection. Term insurance is available for longer durations (e.g., to age 95), but increasing premiums may result in higher overall costs than permanent insurance in the long term.

Term insurance may be ideal to help cover a specific need—such as an outstanding mortgage or business loan—for a short period of time and at the lowest premium outlay. Many companies offer decreasing term insurance in which the death benefit proceeds diminish over time (for instance, to cover a decreasing mortgage balance).

Which Product When?

Only a qualified life insurance professional can help you choose the right policy for your individual situation. With his or her help, you can determine the short-term or long-term nature of your needs, as well as your current cash position and the life insurance coverage you can afford. It costs no more, and may cost less, to get the right advice before you buy.
Copyright © 2003 Liberty Publishing, Inc. All rights reserved.



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