Comparison Term and Permanent Life Insurance
Life insurance is an essential financial product with the life of the insured being the subject of protection. There are two types of life insurance: term and permanent. Term life insurance begins a low premium that increases upon renewal and pays a death benefit to the beneficiaries only if the insured dies within the policy term. On the other hand, permanent life insurance has a fixed premium and is designed to offer coverage for the insured’ s entire life. Both the insurance company will pay a death benefit to the designated beneficiary after the death of an insured. Although term and permanent life insurance behave as protections to ensure the beneficiary's benefit, they have different features: convertibility, cost, and cash surrender value. For instance, term and permanent policy offer different periods of validity.
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Term life insurance provides guarantees for a limited set of years, generally between 10 to 30 years. The beneficiary would not get the death benefit if nothing happened to the insured. In comparison, permanent life insurance, as literally, provides life-long protection. Therefore, term life insurance is more flexible comparing to the durable validity of permanent life insurance. For instance, once a term policy expires, policyholders have the option to renew the current plan, experience new products, or switch to other insurance companies. In addition, the insured can convert to a permanent policy within a given period without provding medical evidence, but only with the company where the policy is purchased. Contrarily, these adjustments are not available to permanent policyholders. Once the contract is signed, changes cannot be made. Thus, although term policies offer a limited time of coverage, they are more flexible for adjustments. On the contrary, the coverage of permanent policies last for entire life, but they are rigid with making changes. Both term and permanent life insurance have the same rule for pricing, which is mainly based on an individual's age and health history. In general, individuals who have a higher risk of dying, such as the elders and people who are diagnosed with severe illnesses, are required to pay a higher premium. However, the cost of premiums still largely different because they have different periods of validity.
Term policyholders usually pay premium at a relatively low price at the beginning, but they need to pay a higher premium for renewals after their policy expires since the price of term life insurance increases over time. In contrast, permanent life insurance’s premium is much higher than term policies’ at beginning, but it is fixed as it never expires. Nevertheless, with a shorter length of coverage and lower initial costs, a term policy is still an ideal and affordable option for people with a lower income, specifically young people. Brant Steck, director for Brokerage Unlimited, believes that the best option for young people is buying term life insurance, and convert the policy to permanent when they have better and stable financial ability. Consequently, term life insurance is an affordable option to begin, but a permanent policy should be considered later because it is more cost-effective in the long run. Choosing between term and permanent life insurance, it is important to reference the cash surrender value and the cash vlaue.
It is a special option opens for permanent policyholders only, which insured can received a surrender value —a portion of premiums — when insured decided to cancel the policy. Therefore, permanent policyholder can enjoy the benefit of decreased financial losses when the contract is ended. In comparison, cash surrender value is not available in a term policy, meaning term policyholders will experience financial losses canceling before the policy ends. In addition, permanent poclies has a cash value that can be accessed after retirement or taken out as a loan. It plays a role of accumulation and allows premiums used towards investment. However, insurance company has full control of where the premium will be invested. On the other hand, term policies do not build cash value and has no investment component. Cash surrender value and cash value are two major benefits of permanent life insurance that give insured opportunities to increase its value over lifetime.
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In conclusion, life insurances fall into one of two basic groups: term or permanent. Both policies promise to pay a sum to the beneficiaries upon the death of the insured, however, they have many differences including the flexibility of changes on the policy, the cost of insurance and the accessibility of cash value money before choosing the policy that fits their needs. There are plenty of options available in the current industry, choosing the right insurance will offer the protection individual needs while accommodate their circumstance.
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