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 expensive, 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 for 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.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.