How to understand the difference between term and permanent life insurance.
Q: What is the difference between term and permanent life insurance?
The term-insurance strategy is the most common and easiest to understand. The insured individual, after qualifying, pays a scheduled premium for a specific number of years. Term policies typically last from 5 to 30 years. If the insured dies within the term of the contract, the specified death benefit is paid income-tax-free (under current law) to the beneficiary of the contract, usually a spouse or a dependent. If the insured outlives the terms of the contact, the contract expires and all the premiums paid to the insurance company are lost. There is no equity built up in a term policy.
Permanent life insurance is more expensive. After qualifying for the insurance, the insured will pay a higher premium than for a term product, but will now build equity inside the contract, referred to as "cash value." There are various types of permanent life insurance. One type is Whole Life, which provides death-benefit protection designed to cover one's entire life. Other variations include Adjustable Life or Universal Life, and give the policy owner the freedom to adjust his or her premium up or down as circumstances change. These adjustments in combination with actual crediting rates may cause the length of time the death-benefit protection is in place to vary.
Although more complicated to understand, the long-term benefits of permanent life insurance can outweigh those of term policies. A major benefit to the permanent insurance strategy is the tax-deferred growth of the cash value. The cash value inside a life-insurance contract grows tax-deferred and can be accessed any time through loans or withdrawals. Please know, however, that policy loans and withdrawals may create an adverse tax result in the event of a policy lapse or surrender, and they will reduce the cash value and the death benefit. People can access their cash value for goals such as helping children with education, maintaining additional emergency funds, supplementing retirement income, or funding other investment opportunities.
One of the more attractive aspects to owning insurance is the fact that it will be there for as long as you want it to be. Generally, as long as premiums are paid or there is enough cash value, the insurance company cannot cancel your insurance, which can also make permanent life insurance a very useful estate-planning tool.
Determining which type of insurance is right for you can be overwhelming. Your specific needs, time horizon, and cash flow will play important roles in selecting the right type of insurance to have in your portfolio. Consult with your financial adviser to identify which strategy best meets your needs.
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The information in this article should not be construed as specific investment advice. Consult a reputable adviser for insight into your particular situation.
RICK SCHULTENOVER is a financial adviser, associate vice president, and associate partner with North Star Consultants, Inc., Insurance Products and Services | CRI Securities, LLC, Securities and Investments, Investment Advisory Services | Securian Financial Services, Inc., Variable Products and Securities, Investment Advisory Services | North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc. CRI Securities is affiliated with Securian Financial Services. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges. 152343 DOFU 2/10