Term and permanent life insurance constitute the two main kinds of policies. As its name suggests, term life insurance covers a policyholder for a specific number of years. Meanwhile, a permanent life insurance policy offers coverage that never expires as long as you pay the premiums.
While some advice indicates that a permanent policy benefits you the most, that may not always be true. At Alliance Income, we carefully evaluate the benefits between term vs. permanent life insurance. Here, you can learn how these two policy types work, including the differences between them.
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The Differences Summarized
Term life insurance covers you for a set period. The most common term policies last for 10, 15, 20, or 30 years. Other term life policies last until you reach a set age, such as 65 years old.
You can choose how long you want term policies, including if you want to renew them when they expire. However, keep in mind that term policy premiums, which are monthly or annual fees, may increase with each renewal. Some insurance companies allow you to convert from a term to a permanent policy to mitigate costs.
Permanent insurance covers you for the entirety of your lifetime. Because a permanent policy entails a lifelong commitment, most companies guarantee that your premium rate will stay the same. Your policy also never expires, so you don’t need to worry about renewals.
Unlike most term policies, some permanent policies come with a savings component. This component, called cash value, builds up funds over the lifetime of the policy. Certain rules allow you to take out some of the cash value while alive.
Both categories consist of several kinds of policies, though they follow the rules for the length of time they last. You can choose your policy based on the time limit, amounts needed, and other necessities.
When deciding between term vs. permanent life insurance, you should consider the long-term needs prompting the insurance policy. Depending on each situation, such as familial expenses, the goals you set, and other necessities, your best choice may differ. You may find a combination of both policies may benefit you the most. Life insurance for those with families looks very different then life insurance for those who are single.
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Common Reasons to Choose Term Insurance
A term policy presents an option for affordable and temporary coverage. Those who benefit most from these policies tend to have a tumultuous period where losing funds would be immediately detrimental.
For example, consider a new family who just purchased a house and now pays a mortgage. They could purchase a 20-year term policy to cover the 20 years they expect to pay the mortgage. Therefore, even if one of them dies during the 20 years, their loved ones can continue paying for their home.
Of course, even if they live past the 20-year term policy, they can reevaluate if they need continual insurance. Some may decide against it because they have paid their mortgage, debts, and other fees. On the other hand, if they haven’t paid their mortgage off, they may be weighing the differences between mortgage and life insurance. Others may decide on another term period or see about changing the term policy to a permanent one.
Common Reasons to Choose Permanent Insurance
People looking for lifelong coverage or cash value in their insurance would benefit most from a permanent policy. A young person who wants to cover future funeral expenses and build a pool of money may buy a policy. Additionally, people with high incomes may use permanent insurance to provide a guaranteed inheritance to their beneficiaries.
While every permanent policy does not have cash value, many do. Some people use these policies as a method of investment for that reason.
However, keep in mind that permanent policies tend to be more expensive than term options. Insurance companies expect you to maintain your policy for life and often provide additional options and resources. These benefits increase the cost, but the premium generally does not increase as you age.
The permanent life insurance category includes three typical types of plans:
1. Whole Life Insurance
Whole life includes the usual death benefit for beneficiaries, but as the name entails, coverage lasts for life. This type of policy may include a cash value growth option, though they don’t always include one.
2. Universal Life Insurance
This option includes additional investment account opportunities. Your beneficiaries receive the death benefit, and any payments you make above the premium can grow on a tax-preferred basis. If the growth remains within legal limits, you do not pay any taxes on the investment growth.
3. Participating Life Insurance
Similar to Universal life, this insurance option allows you to earn money while providing funds to beneficiaries after death. However, instead of earning through higher premium payments, you can earn through dividends. The dividends can reduce premium costs, increase coverage, or become a cash payment to your account.
The Advantages and Disadvantages of Each Policy Type
Between term vs. permanent life insurance, many advantages and disadvantages appear depending on age and financial status. Possibly missing out on potential rates for those reasons shouldn’t deter you from seeking life insurance. The overall reasons for a life policy exist regardless.
A term policy typically costs less the younger you are because insurance companies insureds to live through the term. As such, premiums for term policies cost less for younger people than older ones or those with health issues.
However, you can buy many term life insurance options regardless of age. Because of the finite nature of term policies, the purchase process is easier to understand. Many also don’t include additional benefits, making the application more straightforward.
Keep in mind, though, that term policies provide temporary coverage, and premiums may increase upon renewal. Also, you generally do not receive any returns for the years of premiums you paid.
Permanent policies last regardless of your health status, and most premiums stay at a set price. Additionally, policies purchased at a younger age have lower premiums than term policies purchased once older. Additional tax-preferred cash value growth and dividends also become more common for this life insurance category.
However, permanent policies are usually more expensive due to their longevity. While they present potential investment opportunities, you may receive more funds investing in more traditional ways.
Now, let’s take a look at how term life insurance compares to whole life insurance.
How to Decide Which Works Best
As life expectancies grow and current economic stability wavers, making the decision between life insurance policies can be tough. To help you decide between term vs. permanent life insurance, rely on Alliance Income. Our staff works with interested clients to bring them the best insurance-seeking experience possible.
Complete our free quote form to begin associating with an Alliance Income insurance specialist today!