Term Insurance vs. Permanent (cash-value) Insurance

Which type of insurance should you buy?  Term or Permanent (cash-value)? This is a great question because with today’s complex marketplace, it is easy to become confused. Term insurance is pretty straight forward and is often referred to as “pure insurance.” Cash value life insurance policies, often referred to as “permanent insurance,” are designed to pay a levelized premium throughout your life.   They are often sold as an investment with an emphasis on the investment benefits of the cash value portion–not on the protection that actual insurance provides. Let’s take a look at this in more detail.

Term insurance is pure protection.  Typically you buy a term lasting anywhere from 1 to 30 years.  There are many types of insurances in this category but typically a level premium is established and a level death benefit protection for the “term period.”   If you pass away during this term period, your beneficiary will receive the death benefit protection amount.  Once the term is up, the insurance expires and there is no cash value.  At this point you can renew your policy or convert to a permanent insurance.   Typically term insurance is affordable but the older you become the more expensive the term insurance becomes.

Permanent (cash value) life insurance.  The most common types are  Whole Life, Variable Life, Universal Life and Indexed Universal Life.   This differs from term insurance because the premiums that you pay provide insurance coverage and also have a cash value component.   The funds that goes toward the cash value can be invested in mutual funds, index funds or in the insurance company’s fixed account. These type of plans are more expensive than the term insurance.  During the early years of the policy more money goes toward the cash value and as you get older the true cost of your premium increases while your cash value decreases.   Withdrawals from the cash value of a life insurance policy are tax-free.   Some permanent life insurance policies will also allow you to skip payments.  The skipped payment will deduct the premium amount from the cash value.

Making a Choice

Term insurance typically costs less than cash value insurance when you are younger, but due to the fact that the cost of term insurance is based on your age, the cost may eventually exceed that of cash value if you continue to renew.  Usually term insurance can be a good choice for younger families and individuals, who need protection against loss of income of a primary earner.    Permanent insurance is a good way to force yourself to save money to use for college funds or retirement. The cash value continues to grow-tax deferred as long as the policy is in force.