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Life insurance policies: What’s the difference between term vs. permanent?

February 15, 2023 / 5 min read

Are you trying to decide what type of life insurance policy is best for you? Here’s our expert review of the two main types of life insurance — temporary and permanent — and the key features of each.

At first glance, finding the right life insurance can seem intimidating due to the complex acronyms and  terminology used in policy descriptions. The good news is life insurance basically boils down to two options: term — or temporary — insurance, and permanent insurance. Each has its own benefits and features, and there’s no one-size-fits-all approach.

When choosing the type of life insurance policy that’s best for you it’s important to keep in mind the primary purpose of all life insurance: to provide a benefit to an individual, group of individuals, or an entity in the event of death. The decision to purchase insurance is usually driven by a desire to protect family members or to fill a specific financial need such as safeguarding business interests, estate planning, or a combination of these factors. In addition to choosing the type of insurance to buy, the amount of coverage needed and the associated cost of premiums are key considerations. The amount of coverage needed and the associated costs are key considerations. Premiums are based on the insured’s age, gender, and health at the time of application. The type of policy you choose is also influenced by factors such as time horizon and various features of the available products. Let’s take a look at the core elements of each type of life insurance.

Term life insurance

Term life insurance provides affordable coverage that lasts for a limited period of time, and is usually the least expensive insurance you can buy. Most policies are designed for premiums to remain at a level rate for a set number of years, but some have premiums that increase annually. Upon the term policy’s expiration, if renewal is permitted, the premiums may increase significantly. If you pass away while the policy is in force, the death benefit of the policy will be paid to the beneficiary, typically in a tax-free lump sum. Any time the coverage is no longer needed or wanted, premium payments may be discontinued, causing the policy to lapse. Key features of term insurance include:

Term insurance is often purchased to meet a specific need or combination of needs. Common reasons to buy term insurance include:

Permanent life insurance

Unlike term insurance, permanent life insurance can provide lifetime coverage and a cash savings component. Because of its long-term protection and ability to build cash value, permanent life insurance policies have significantly higher premiums compared to term insurance. Common types of permanent life insurance include whole life, universal life, indexed universal life, and variable universal life insurance.

All types typically provide a tax-free death benefit upon the insured’s passing. If the policy has cash value, it’s accumulated tax-deferred and may be withdrawn or borrowed against as needed. Some policies also have options to purchase riders that cover premiums in the event of a disability, provide long-term care benefits, etc. The two primary types of permanent life insurance are:

Permanent life insurance can be purchased for a variety of reasons. In addition to the temporary insurance needs listed previously, some additional uses include:

To decide which type of life insurance policy is best for you, connect with your financial, estate planning, and insurance advisors. And remember, as life evolves, it’s wise to periodically review your life insurance goals and objectives in conjunction with your broader financial and estate plan. What may have been appropriate years ago may no longer be applicable today.

The material contained in the article is for informational purpose only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This is being provided solely as an incidental service to our business as (insurance professionals, financial planner, investment advisor, securities broker.) Any mention of guarantees are limited to the claims paying ability of the insurance company.

Securities are offered through Valmark Securities, Inc. member FINRA and SIPC.  Plante Moran and Valmark Securities, Inc. are not affiliated.

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