The Difference Between Term Life Insurance and Permanent Life Insurance
Everyone pretty much knows what term life insurance is. They know it as a general term, as something that can help ensure that family members are taken care of financially if the policyholder dies. There are a few things that people don’t quite understand, however. Many people do not realize that money paid out from a life insurance policy is tax-free. Others do not realize that life insurance may impact other types of financial planning. There are multiple life insurance products on the market. Including, but not limited to, term life insurance and permanent life insurance.
Term Life Insurance
Often people may get a bit confused when trying to understand term life insurance. They are not exactly sure what someone means when they are talking about “term” life insurance. They simply do not see life insurance as something that can be broken down into terms. Term life insurance, however, is just that. This insurance covers the insured over a certain period of time. This period of time is flexible, and is set by the insurer and the insured and usually available in 10, 15, 20, 25 or 30 year terms. The benefits given through life insurance are only covered if the insured passes away during the set coverage time.
Term life insurance is often referred to by some as “temporary insurance as the policies do not accumulate cash value and offer coverage for a specific period of time. This means that if the insured does not pass away during the time of the policy is in effect, beneficiary of the policy does not receive any benefits. Because of the specific timeline offered by term life insurance policies, companies may offer a chance to switch over to a more permanent version once the “temporary” one ends.
Term life insurance can help when a timeframe is all you need and term life insurance payouts are non-taxable. This type of insurance is best suited for those who are looking for a lower cost life insurance policy because the insured is only paying for a certain period of time (and is in turn only covered for that period of time), the cost is lower than a permanent insurance policy.
Permanent Life Insurance
Permanent life insurance is the opposite of term life insurance. Permanent life insurance covers the insured person for their entire lifetime. This type of policy does not have a timeline or a “window” that limits the coverage of the insured for a specific number of years. This type of life insurance allows the assured to accrue cash value over the course of their payments. This value may be taken out, in the form of a loan or money for emergencies.
Permanent life insurance allows for death benefits to be paid when the insurer passes away, no matter the time frame. Some companies actually allow for payments before the insured passes to cover the last minute costs for care or short-term treatment. You can borrow and withdraw from the cash value of the policy, which is appealing to many people. The premium remains constant over their lifetime and does not change as years pass.
If you are in the market for insurance, you need to take a look at your current situation, as well as what each type of insurance offers to fully understand which type of insurance is better for you. Some may benefit more from term life insurance, whereas others may benefit from permanent life insurance. Either way, an informed decision is always better than a random choice.