The many options available for life insurance can be confusing. For example, many insurance shoppers are confused about the advantages of permanent life insurance over term life insurance.
Term Life Insurance - Cheap and Basic
Many people opt for term life insurance because it is less expensive. While this is not a bad decision, it is important to understand the advantages and disadvantages. Term life insurance covers you for a period of time at a regular monthly premium. If you don't renew the policy, it lapses and you have no coverage and no residual value.
Renewing term life insurance is easy. Since renewal requires no medical exam, life insurance of this type is easy to maintain even if you acquire later health problems. There are several types of term life insurance. A convertible policy can be made into a permanent policy without a medical exam. A decreasing policy pays a death benefit that falls in value over time but the premium remains the same regardless of age.
Permanent Life Insurance - An Investment in Your Future
A permanent policy covers you your entire life as long as you keep paying the premiums. The policy gains cash value with every premium payment. If that value gets high enough it can be used for premium financing, allowing you to keep the policy through times you don't have the income to pay for it.
The cash value can be tapped into after retirement, a practice called "life settlements." Permanent insurance is often called whole life, but whole life is merely one type of permanent insurance. With a whole life policy you have a fixed premium and fixed benefit over the life of the policy.
Universal life allows the flexibility of changing the death benefit, for example increasing it as your children are born. Some changes require a medical exam to verify your insurability. Variable life invests your premiums in assets such as stocks and bonds. It carries the potential for both higher and lower return on your investment than a whole life policy.
Term vs. Permanent - Renting vs. Buying
When deciding which is better for you, think of it as renting an apartment or buying a house. Term life insurance is like renting an apartment. You pay every month and as long as you pay, you have a roof over your head. Your rent payments are lower than a mortgage, but when you move out you have nothing to show for it.
Permanent life insurance is similar to buying a house. It costs more but you build value in your investment, slowly at first and more rapidly later. Term life insurance is popular for, among other things, senior life insurance since seniors aren't likely to hold a new permanent life policy long enough to get a good return on investment. Permanent life is a longer term investment popular among parents who want to provide for their children.
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