When families aren’t properly insured, they’re at risk of losing financial security, especially if the primary wage earner dies. Yet according to insurance research and professional development organization LIMRA, 30 percent of American households do not have life insurance protection. If you need coverage, the first step is to understand the difference between term and permanent life insurance.
Term life insurance
Term life policies provide insurance for a specific amount of time, or “term.” The period usually lasts from one to 30 years. If the insured dies during this time, the policy pays out a death benefit to the beneficiary. Term insurance is usually less expensive than permanent insurance. People often purchase these policies to provide protection against loss of income, especially if they have children who are dependents, or are still paying on a mortgage. Insurance premiums may remain constant during the term, or they may increase annually. Some policies allow you to renew terms when they expire, although rates will rise at renewal. There is no savings, or cash value component, to term life insurance.
Permanent life insurance
As the name implies, permanent policies last for your entire life, as long as the premiums are paid. Life insurance quotes for this type of coverage generally are higher than with term insurance.
Over time, a portion of the premiums is used to fund a “cash value” for the policy. This is a type of savings vehicle that may rise in value, which could help pay the insurance premiums in later years. The cash value is generally a tax-deferred investment.
There are three major flavors of permanent insurance: whole, universal and variable.
- Whole life. Also known as “ordinary” life insurance. Premiums typically remain the same throughout the life of the policy and the cash value grows at a fixed rate.
- Universal life. Also called “adjustable” life insurance. This type of insurance lets you pay policy premiums according to your own schedule, as long as specific minimums and maximums are met. These limits are detailed in the insurance contract. If you’re healthy, the policy may also contain a provision to let you increase the death benefit to a beneficiary.
- Variable life. Lets you invest premiums in instruments such as stocks, bonds and other vehicles. Although you may earn a cash return on your premiums, it’s also possible the cash value of the policy could decrease if markets under perform.
Life insurance through an employer is likely to be a term policy. It generally ends when you leave the company, which is why it’s good to have your own life insurance policy. However, in some states, you may be able to convert that group life policy to a permanent one when employment ends. To be sure, check with the human resources department.
Upon death, the face amount of permanent insurance is paid to the beneficiary, assuming there have been no withdrawals, loans or surrenders against the policy. In those cases, the face amount would be reduced. Note that a permanent life policy generally does not pay out the cash value plus the death benefit.
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