Term Life Insurance against Permanent Life Insurance

There are two types of life insurance available in the market: term life insurance and permanent life insurance.

The main difference between the two is that term life insurance covers you for a specified period of time whereas permanent life insurance covers you for life.

Permanent life insurance is more expensive because it allows the policy to increase its cash value which ultimately means more money for your beneficiaries when you die.

So how do you decide what’s best for you? Obviously permanent life insurance has a better payout in the long run. The most appealing element of permanent life insurance is its ability to gain cash value. A portion of the money you pay into your premium goes into a cash account that grows over time.

But if you want a short-term coverage for the least amount of money, it is better to buy a term life insurance policy. The money you save from the premiums in term life insurance can be invested wisely in the stock market.

So how does the cash value component work? Cash value accumulates rapidly in the beginning because you are younger and your mortality rate is lower. As you grow older, this process starts slowing down as the chance of you dying increases. It makes the cost of insuring you go up, as well as increasing your mortality expense.

The mortality expense is a certain amount of money the insurance company takes out of your payments every year to pay for insurance costs and processing. This generally doubles every ten years. The more they take out, the less goes into your cash value. However, your premiums don’t increase as these have already been factored in by the insurance company. On an average the cash value accumulates up to 6% annually. Of course if your money is invested in the stock markets, then, it will fluctuate high or low along with the economy. Upon your death, unless you have specified that you want your cash value tied into your death benefits your beneficiaries will not get the cash value you accumulated. So ensure that all the fine print is read when applying for permanent life insurance.

Cash value can be considered a liquid asset as it allows you to withdraw the money when you wish. However, this withdrawal may be associated with some penalty or fee. Another way to use the cash value is by taking out a loan against it. You don’t have to pay it back, but the initial amount, plus 7% to 8% interest on it will be taken out of your death benefit when you die. This may leave your beneficiaries with much less depending on what your loan amount is.

Another thing to remember is when you withdraw funds from your cash value, it may become taxable. Also, if you take out a loan against it, and you surrender the policy or it lapses before you pay it back, you will be taxed on the difference of the loan amount and the total amount of the premium.

Permanent life insurance and cash value do take a while to accumulate, so if you’re not very concerned about the distant future, a term life policy will be a better option.