Life insurance is essentially a financial contract between an individual and a life insurance company, under which the face amount of the policy will be paid by the insurance company to the named beneficiary upon the death of the person whose life is insured. Of course, there is a cost. In return for this promise to pay, the owner of the policy must pay premiums to the insurance company.
There are two basic forms of life insurance: term insurance, and permanent insurance. Under each of the broad categories of insurance – term and permanent – there are a variety of choices. Many of the life insurance companies have their own brand names to describe their various kinds of policies. This can make it difficult for a buyer to distinguish between term and permanent. In fact, some policies are a hybrid of the two – such as Term to 100. There are also a bewildering array of options, special features, and “bells and whistles” which can be added to a life insurance policy. The wide variety of choices makes it difficult for one to comparison shop, which is why it is so important to sit down with an experienced life insurance agent.
Term Insurance
Term life insurance is what its name implies – it provides coverage for a specific number of years, or until a certain age is reached. Generally, a death benefit is payable by the insurance company only after the death of the insured person has occurred, and only if the death has occurred within the time period covered by the policy.
Typically, the premiums paid under a term policy are low (compared to permanent insurance) in the early years, and the premiums rise each year or in stages as you get older. Most term policies have level premiums for the entire term of the policy.
Permanent Insurance
There are several kinds of permanent insurance, such as:
- whole life;
- universal life; and
- variable life.
What all types of permanent insurance have in common is that they will remain in force for your entire life – provided of course, that you have paid the required premiums! Permanent insurance differs from term insurance in another important way. A permanent insurance policy has a savings element or so-called cash value. In simple terms, the savings component of permanent insurance will grow larger the longer the policy remains in force. Most permanent policies allow the policyholder to withdraw some or all of the cash value of the policy during the policyholder’s lifetime. (With term insurance, you have to die before any payment will generally be made.) Also, permanent insurance policies usually give the policyholder the ability to obtain a loan from the insurance company up to the cash surrender value of the policy.
When you purchase permanent insurance instead of term, your premiums are higher because part of the premium is to cover the pure insurance risk, and part is for the so-called savings or investment component of the policy.
