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Understanding the Difference between Term and Permanent Insurance

Before you start off on your quest to buy a life insurance policy and begin searching for online quotes, you need to understand the difference between term insurance and permanent (or “whole life”) insurance. While the terminology may seem foreign to you now, the differences are actually very easy to understand.

Term Insurance

Term life insurance is generally considered the most affordable form of life insurance. In reality, because it does not offer the same benefits as permanent insurance this is an unfair comparison. It is better to say that term insurance is the cheapest from of life insurance. Term insurance premiums are cheaper than permanent insurance for two reasons:

  1. The premiums are for the cost of insurance coverage ONLY.
  2. The insurance company does not take on as much risk because your death must occur within a certain window of time for the policy to be payable.

With term insurance you pick a period of time between one and thirty years and that is the number of years for which your insurance policy will pay a death benefit should you die. If the contract comes to an end and you are still alive, the policy is cancelled and no benefit is paid, but you may be able to convert the policy to a permanent policy at that time. The premium for your converted policy will be based on your age and health at the time of the conversion.

Permanent Insurance

Permanent insurance policies are those policies that pay out a death benefit upon the death of the insured no matter when the death happens. Permanent policies are not for a specified term but for life-as long as premiums are paid consistently.

There are many different policy types that fall under the umbrella of permanent insurance including:

  • Variable
  • Universal
  • Whole life
  • Equity Indexed

Each of these policies has more expensive premiums than term insurance because with term insurance, you are paying only for the cost of insurance. With permanent insurance, not only are you guaranteeing coverage for your entire life but you are also accruing additional funds in the form of cash values. These cash values give your policy additional use as a source for loans or cash if you terminate the policy. These values can increase your death benefit as they accrue, although this is not true in all cases.

The difference between term and permanent life insurance can be put simply:

A term policy covers you against the possibility that you might die during a certain period of time but a permanent policy covers you against death at any time.

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2 Responses to “Understanding the Difference between Term and Permanent Insurance”

  1. Anitra says:

    This “free sharing” of ifnrotmaion seems too good to be true. Like communism.

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