There are two basic types of life insurance: term life insurance and permanent life insurance. Which one is better? The answer depends on factors such as your goals and your situation in life. Here is a brief look at what separates the two different types:
Term Life Insurance – This type of insurance is temporary in nature. Rather than accruing value over time, it is a fixed death benefit that stays constant over the life of the term, but only for a long as the predetermined term you chose when you signed up.
Coverage on term life insurance ends when the term expires. In effect you are “renting” protection for your beneficiary in the event of your death. When the term is over, the benefit goes away and no equity remains.
When the term expires, you either move on without coverage or you must reapply to extend your term. However, the premium will be adjusted accordingly to reflect the risk associated with your age and health as well as the future term you desire.
Because term life insurance is designed to be in place for only a specific period of time, most people buy it to protect their loved ones from the obligations of financial burdens that disappear over time, such as a mortgage or childcare expenses.
Permanent Life Insurance – This type of life insurance stays with you for life. It is an asset that accrues value over time, offering both protection as well as growth. Because you own this policy, as you make premium payments you are building equity, just like you earn equity as you pay your mortgage on your home.
In life insurance terminology, the equity in this type of plan is called “cash value”. This equity grows tax-deferred and is based on a portion of your premiums paid and dividends that insurance companies pay.