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Life Insurance Policies: term vs. permanent

Life insurance policies come in a number of varieties; the basic two types are “term” and “permanent”.

Both types of life insurance policy:

  • Run for an agreed period of time, or until you die.
  • Pay out an agreed amount of money to your beneficiary in the event of your death (as long as it is within the period insured)
  • Require that premiums are paid at regular intervals. (Both will become void, without any refund of monies accrued, in the event of premium payments not being maintained)
  • Cannot be cancelled by the insurer, unless in cases of fraud.

Beyond those considerations there are quite substantial differences between the two types.

A term life insurance policy

Term life insurance policies are probably the simplest form of life insurance, they guarantee a set amount to be paid out in the event of your death during the agreed term (or period of time) of the policy. They serve no other function.

Usually, although not exclusively, these policies are used to guarantee that a financial commitment is met in the event of your death. I.e. A mortgage or large loan will be paid in full by the policy if you die while it is active.

A term policy can also be used, and be considerably more expensive, where the policy holder has left it late in life to secure adequate permanent life insurance, and annually renewable term life insurance is the only option available to them.

A permanent Life insurance policy

Permanent life insurance policies could be considered to be a form of savings.

Normally a permanent life insurance plan will begin relatively early in the policy holders life and the premiums at the beginning of the period may seem quite high to the policy holder. These premiums however, do not change over the length of the insurance policy, and as the policy holder ages they come to see that the premiums they are paying are not only a good investment for their elder years, but with the effect of inflation have actually decreased since inception of the policy.

Permanent life insurance policies also have other options open to them in the form of:

  • Loans: a policy holder is able to borrow money from the insurance policy (subject to certain limits, such as the time the policy has been in action) which can be repaid at a later date. If the policy holder dies with an outstanding loan against the policy, these are deducted from the final amount paid out.
  • Withdrawals: Unlike a loan, the policy holder can choose to withdraw amounts from the policy (again the amounts and timings of the withdrawals are restricted). This will lower the final amount paid out upon the policy holder’s death.
  • Total policy surrender: As a permanent life insurance policy accrues interest during its lifetime, its value increases above the amount of premiums paid into it. A policy holder can, after a certain period of time elect to “surrender” the whole policy and be paid the current value of the investment less administrative charges and a percentage reduction as specified in the surrender clause of the contract.

Some permanent life insurance policies (known as endowment policies) have a set period assigned to them where the policy holder is automatically paid the value of the investment after an agreed period of time (15 or 25 years are normal periods, although others are available).

Upon both surrender of a policy and payment of an endowment policy, it is the policy holder’s responsibility to obtain further life insurance as the current policy will have been terminated.

Another form of permanent life insurance is called a limited-pay life insurance policy. This is where the amount paid out at the time of the policy holder’s death is guaranteed, but the premiums are restricted to a limited period (say 10 or 20 years). This type of policy has the added bonus that if it is started soon enough in one’s life the premium period can be met before retirement age is reached and no further premiums are required as you start to rely solely on your pension.

So, in conclusion, what are the benefits of term vs. permanent, or permanent vs. term?

Term insurance policies are solely there to provide a payment to your upon the event of your death.

Permanent insurance policies will not only take care of any financial commitments at the time of your death, but can also be used as a source of occasional income if need be, at the expense of potentially lowering the amount paid at the time of death.

Considering premium differences; term insurance premiums grow as you get older, whereas permanent premiums don’t. But in all, if the policies are started at the same early age in one’s life the overall premium paid tend to even them out, meaning overall you will pay no more for a term than you would for a permanent insurance policy.

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