Term Life vs. Permanent Life: What is best?

Have you been thinking about life insurance lately? Do you have loved ones that need you financially, and if not you a safety net? We know when shopping for life insurance there is a lot of options to choose from, some better than others, and this can be confusing.

In this article we will answer the question asked a million times: Is term life better than permanent life? We wish this was a simple answer, but both term life and permanent life have value depending on what your circumstances may be.

Permanent Life Explained

Permanent life insurance, true to its name, protects the insured for his/her lifetime. These policies build up cash value that can be withdrawn tax-free and used for things such as buying a car, paying off a mortgage, or supplementing your retirement.

Permanent life insurance consists of two major types:

• Whole Life Insurance
• Participating Whole Life
• Non-Participating Whole Life
• Universal Life Insurance
• Guaranteed Universal Life
• Indexed Universal Life
• Variable Universal Life

Whole Life Insurance

Whole life insurance is a permanent policy with a guaranteed premium, death benefit, and cash value accumulation. The only difference between a Participating WL and Non-Participating WL is Participating WL earn a dividend along with the guaranteed cash value. Dividends are not guaranteed and are based on the company’s annual earnings report.

Universal Life Insurance

Universal life insurance is flexible than whole life insurance, in that you can adjust the premium and death benefit if the need arises. The main difference between universal and whole life is how the cash value interest is credited. Also depending on which type of universal life policy you choose; the premium may not be guaranteed. The three types of universal life are:

• Guaranteed Universal Life - Closest to being like a whole life policy, the premium and death benefit are guaranteed. These policies build up some cash value but are more for death protection.
• Indexed Universal Life - This type of universal life tends to not come with a guaranteed premium. The other difference is how the cash value is credited to the policy. The cash value is invested in indexes (such as S&P and Nasdaq). There is a cap on how much interest can be earned, but also comes with a floor to guarantee no money is lost.
• Variable Universal Life - This by far is the riskiest life insurance policy out there. Works very similar to the products above, except the cash value is invested in sub-accounts that mirror mutual funds. These accounts have no caps on gains, but also no floor on losses.

Now that you have the basics down for Permanent life insurance, let’s move on to term.

Term Life Explained

Term life insurance is the purest form of life insurance. You pick the amount of coverage you want, and the length want. Term life doesn’t build up any cash value, so basically you are renting the coverage. The one down side to term is that it does expire at some point, and sometimes that can be when it’s needed the most. The three types of term life are:

• Level Term Insurance: This is the most popular, providing a level premium and death benefit for the entire term period chosen.
• Decreasing Term Insurance: This type of term is popular with protection mortgages, since the death benefit decreases each year. The only problem is as the death benefit decreases, the premium stays the same.
• Annual Renewable Term: This term policy starts out with low premiums, but they increase each year on the anniversary date. These policies tend to get expensive late in life.

The Answer

First, we want to apologize for saying we would answer the question of which policy is best: Term or Permanent? That question cannot be answered, because depending on your situation and what your objectives are, they both may be perfect choices. The key to buying life insurance is to look at all your options before making any kind of decision. Consult with an experienced independent agent to help guide you through all of your choices.