- Differences between term, permanent life insurance
- July 2, 2013
As of right now, there are over 1,500 active life insurance companies, each offering a variety of policies, which makes for an endless amount of available options. This can make your decision even more difficult.
No guide, adviser, or reference can feasibly cover every type of policy. This column is designed to help you distinguish the differences between term and permanent life.
For starters, all life insurance policies promise to pay an agreed sum of money if the insured person should die while the policy is in-force, but all life insurance policies are not the same.
Some policies provide permanent coverage while others temporary coverage (i.e., term life insurance). Some policies combine different kinds of insurance (e.g., a permanent base policy with a term “rider”), and yet others let you change from one type of insurance coverage to another.
Here is a summary of both term and permanent life insurance:
– As the name implies, it is purchased for specified term of years.
– The cost (premium) is lower, especially for younger applicants.
– As you get older, premiums systematically increase year by year.
– It has no residual value, which means it expires without value at the end of the term.
– According to a 1993 study of over 20,000 by Penn State University, less than one- percent of term policies ever pay a death benefit.
– Most term policies cannot be renewed beyond the age of 75, but annual renewal term policies (ART) may usually be renewed up to age 100.
– Renewing ART policies much beyond age 70 or 75 becomes prohibitively expense, which makes it impractical for most people.
– Premiums payments usually remain the same each year, but not always.
– During the first few years, premium payments are considerably higher than term life insurance policies
– Premium payments may be discontinued under certain circumstances and some provide significant degrees of flexibility.
– Interest or other earnings on the cash value are tax deferred.
– Typically, permanent policies make no sense without a long-term commitment from the buyer, since little or no cash surrender value accumulates in the first few years, in most cases.
– Coverage may stay in-force up to age 95 or greater, leaving the policy with residential value (cash value – sometimes called cash surrender value).
– Access to the cash is available through loans and withdrawals.
Unfortunately, it can get confusing. When a term policy accumulates a cash value, then it is typically a form of universal life policy, not term insurance. But there are exceptions.
For example, a “term to age 65” policy will typically accumulate a cash value in the intermediate in-force years. This cash value will then gradually reduce to zero by age 65, which is when the coverage automatically ends.
Remember, your decision should be based on your needs and what you can afford.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.