A Short Course in Insurance: Term vs. Permanent

There are two basic types of life insurance coverage—permanent (sometimes referred to as cash value) and term. Permanent insurance not only helps provide financial security at the death of the insured, but it also maintains a cash value for the policyholder. Premium payments first pay the cost of the policy coverage itself. Then, the insurance company invests the “leftover” dollars. Some cash value policies provide policyholders with annual dividends, which are the result of higher investment returns and lower expenses than were originally predicted when premium amounts were set. Dividends are not guaranteed.

Premium amounts are contractually guaranteed and will not change as long as they are paid in accordance with the schedule set forth in the policy. Permanent life insurance protection is guaranteed in accordance with the terms of the policy. Evidence of insurability will never be necessary as long as the original policy remains in force, and benefits will never decrease.

Funds may be borrowed against the cash value of the policy at a predetermined loan interest rate. These loans are generally tax free, and there are no restrictions on their use. However, keep in mind that withdrawals may be subject to surrender charges and could have a permanent effect on the cash value and death benefit.

In a term insurance policy, there are three basics to consider: First, the period of protection is for a predetermined, specified term. Second, policies do not accumulate cash value like permanent insurance. Third, premiums may initially be substantially lower than cash value premiums. Premiums will, however, increase over the period of protection. While term insurance is available for longer durations (e.g., to age 95), increasing premiums may result in higher costs than permanent insurance in the long term.

A thorough review of your insurance needs can help you choose the right policy for your individual situation. It is important to determine the short-term and/or long-term nature of your needs, your current financial position, and the coverage you can afford.



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