Permanent life insurance is a form of life insurance in which case the policy is valid for the life of the insured whereas term life insurance is valid for a specific term that can vary from 5 to 30 years.
Premiums for Permanent vs Term Life Insurance
Permanent life insurance as the name suggests is permanent (for life) and hence the cost or premiums every month are higher than term insurance. The death benefit or surrender amount is paid in the event of death or when the policy is surrendered.
Term life insurance is valid for a certain duration (term) and once the term gets over, the insurance expires. The premiums are lower than those for permanent life insurance and vary depending on the duration of the term.
Types of Insurance Policies
In the case of whole life insurance, for a level premium, cash benefits and guaranteed death benefits are provided by the insurer. The advantage of this policy is that annual premiums are fixed and known and equity in the form of cash benefits is built up in time that can be accessed without paying any interest. The disadvantage of this is that the rates of return do not match up to the competitive rates and the premiums are expensive and not flexible.
Universal life provides greater flexibility in the payments of premium and the amount paid above the cost of insurance are added to the cash value. Since this policy has cash account, interest is paid on the account at a specified rate. Administrative and other charges are then deducted out of this cash account.
In limited-pay insurance, premiums are paid only up to a limited period of time (generally up to the age of 65) to keep the policy active.
Endowments are types of policies in which the cash value equals the death benefit at a certain age, known as the endowment age. Since the payment period is shorter, such policies are more expensive than the other types of permanent insurance. Accidental insurance, as the name suggests is paid in case of accidental death of the insured. Though, this type of insurance is less expensive than other permanent life insurances, it does not cover death due to an illness or caused by risky sports such as mountaineering, parachuting and the like. This type of insurance can be also be added to the main policy as a rider.
Term insurance is also of different types. Annual renewable term insurance is valid for a year with a guarantee that it can be renewed for an equal or lesser amount with a set premium. Mortgage insurance is one in which the death benefit usually equals the mortgage amount of the policy owner’s residence that can be paid in the event of the death of the owner. If the insured person commits suicide within the first two years of the policy, the premiums are returned, but if the suicide takes place after the first two years, the full benefit is paid to the beneficiary.
Pros and Cons of Permanent and Term life insurance
Permanent life insurance builds cash value, that allows you to borrow money from your insurance after the first 2 years, and lasts till you die or turn 100, whichever comes first. The other advantage is that the premiums remain level throughout the life of the policy. The main disadvantage of this type is that it is expensive and may not be suitable for individuals that exceed a certain age.
Term insurance is more affordable and costs much less than permanent insurance. The disadvantage of term insurance is that it has no cash value or equity. Also, although the premiums may remain low for the initial term, once renewed may increase dramatically.