Permanent vs. Term
There are two main types of life insurance, ‘permanent or whole of life insurance’ and ‘term insurance’. Permanent life insurance provides coverage for the lifetime of the policyholder, whereas term life insurance provides coverage for the duration of an agreed period in time. For all policies it’s crucial to ensure that premium payments are kept up to date to keep coverage in place
Permanent life insurance tends to be the more expensive option, though often has the advantage of being more flexible. It can have many purposes including personal protection, family protection and inheritance tax planning, and can be combined with a term insurance to cover specific debts as required.
Typically, policyholders’ contributions are invested and life insurance benefits are ‘purchased’ using the investment fund. The fund’s performance, along with other factors, has a significant effect on the level of future benefits. As time progresses and the policyholder’s age increases the cost of the insurance increases. This reduces the sum available for investment. The investment element varies from insurer to insurer; some are more generous payers than others, making the expert advice of an insurance broker or independent financial adviser invaluable in choosing such a policy.
Some plans require contribution until the policyholder’s death, some for a set period of time, and some up until a certain age is reached, with additional options available to cover specific illnesses or disability. The common factor throughout is that coverage is maintained for the life of the policyholder, making permanent life insurance a very popular way to leave dependants a sum of money.
Basic types of Permanent insurance
- Whole life (ordinary life) is the most traditional type of cash value insurance. Generally premiums and death benefits stay the same over the life of the policy. The policy’s cash value grows at a fixed rate.
- Variable life With a variable life policy you can choose among a variety of investments offering different risks and rewards—stocks, bonds, combination accounts, or options that guarantee principal and interest. Death benefits and cash value will vary depending on the performance of the investments you select. By law, you’ll be given a prospectus for variable life insurance. This prospectus will include financial statements and outline investment objectives, operating expenses, and risks. The cash value of a variable life policy is not guaranteed. If the market doesn’t perform well, the cash value and death benefit may decrease, although some policies guarantee that the death benefit won’t fall below a certain level.
- Universal life gives you flexibility in setting premium payments and the death benefit. Changes must be made within certain guidelines set by the policy; to increase a death benefit, the insurer usually requires evidence of continued good health. A universal life policy can have a variable component.
Permanent insurance Advantages
- Lifelong protections as long as the premiums are paid.
- Premium costs can be fixed or flexible to meet individual financial needs.
- A policy accumulates a cash value, which can be borrowed against, surrendered for cash, or converted to an annuity. The cash value also can be used to pay premiums or to buy more coverage.
Permanent insurance Disadvantages
- Designed to be kept for the long term.
- Canceling a policy after only a few years can be expensive. For the short term, term insurance may prove a better value.
Term life insurance offers basic coverage for a set number of years, from one to 10, 20, or 30 years. This coverage is usually at a much lower cost. A term life policy requires a regular premium payment and pays out a lump sum on the policyholder’s death providing this occurs within the term of the policy. Death outside of the term to which the policy applies won’t result in a payout.
Some term policies can be renewed at the end of a term. However, premium rates will usually increase upon renewal. Many policies require evidence of insurability to qualify for renewal at the lowest rates. At the end of a term, you also may be able to convert the policy to a cash value policy. Term policies don’t usually build up a cash value, but policies with a return of premium benefit will have a small cash value.
Term Insurance Advantages
- A policy can cover financial obligations that will disappear over time, such as a mortgage or college expenses.
- When you’re young, premiums are generally lower than those for permanent insurance.
Term Insurance Disadvantages
- Provides protection for a specific period of time, not for life.
- Premiums increase as you grow older and your health status changes.
- Policies don’t usually build up a cash value.