Term VS Permanent Life Insurance


Term, Permanent, Whole Life, Universal Life,
Participating, Variable, Joint. There are so many variations of life insurance
that it can become extremely confusing, very quickly. Hopefully I’ll help clarify what these types
are and their purposes today, so that you can make sure you have, or get, the most appropriate
kind for your needs. I’m Susan Daley and this is Your Money,
Your Choices. To make things simple, there are essentially
two types of insurance: term insurance and permanent insurance. Term insurance is used to cover a temporary
need. Now temporary could be 1 year, or it could
be 40 years. While 40 years might seem like forever for
a young person, the idea is that the need will eventually go away. Term insurance is used to cover your Human
Capital, so that if you die, your beneficiaries can cover debts like mortgages and other loans
and continue their standard of living without your income (or in-kind services like taking
care of children). Term insurance will cover you for a specified
period of time, i.e. the term of the policy. The most common term insurance policies are
for 10 or 20 years. This means that if you take out a 10 year
policy, you’re covered and receive the death benefit if you pass away at any point within
those 10 years. Once the 10 years are up, the policy ends
and you’re no longer covered. At that point you decide if you no longer
need insurance, or take out a new policy for the future. The premiums for term insurance policies are
lower when you are young and higher as you age. This is because the younger you are, the lower
probability of you dying. For most families, insurance needs are higher
early on (when children are young, the mortgage balance is still high, retirement and education
savings are relatively low), and decrease as time goes on, as mortgage payments are
regularly made, and savings and investments accumulate. This makes term insurance the cheapest option
for young families when their insurance needs are high. You’re covering your butt in case the worst
happens, but not paying more for something that you won’t need longer-term. On the other hand, permanent insurance is
designed so that it’s in force for your whole life. This is why it is also referred to as whole
life insurance. The death benefit works the same as a term
policy. Your beneficiaries will receive the death
benefit if you pass away while the policy is in force. If you keep the policy intact by paying the
premiums, this death benefit will be paid at any age – if you die at age 35, or if
you die at age 95. Premiums are level throughout the plan. Your premiums are higher than they would be
for term insurance when you’re young, but lower than term insurance as you get older. A portion of your early premiums are set aside
which then grow over time to pay for what would have been higher premiums later on. These surplus premiums can be saved or invested
and the cash value can be used by retirees to purchase an annuity if no longer need insurance,
can be used to keep a policy in force if you don’t pay the premium, or you can borrow
against the cash value if you need the money. Participating insurance is a feature of a
permanent insurance contract. Insurance companies use conservative estimates
for premiums on permanent insurance to reduce their risk. Since permanent insurance policies are in
effect for such a long time, it can be very difficult to estimate assumptions. Therefore, they charge higher premiums so
they aren’t potentially stuck with huge death benefit payments and not enough cash
if their assumptions are off. Participating policies will “refund the
premium surplus”, if any, in the form of dividends. Premiums won’t go up, and death benefits
won’t go down. The dividends can be used to reduce the out
of pocket premiums you owe, taken out as cash, used to purchase more insurance, or can be
left in the policy and accumulate interest. Universal life is also a permanent insurance
policy however, there is more flexibility to change plans as time goes on depending
on how investments have done, actual mortality costs, expenses and other contingencies. The upside is that your premiums might decrease,
or your death benefit might increase. However, while premiums might go down, the
downside is that they may go up as well. Variable insurance is a permanent whole life
policy where the cash surrender value (i.e. the amount of premiums you overpay to offset
the increase in costs as you age) vary based on the performance of an investment fund or
index, rather than simply accruing interest. Finally, joint insurance is paid out on the
last surviving spouse’s death. Therefore, this type of insurance is useless
in providing the surviving spouse with replacement income when their spouse dies. It is used to cover estate needs like a desired
inheritance or covering taxes owed upon death. While there are many different features around
permanent insurance, there are really only two types of basic insurance. Term and permanent. For the vast majority of people who are looking
to cover the risk of maintaining their dependent’s lifestyle if they pass away, term insurance
will be the cheapest and most effective way to do this. Do you have insurance? What have been your experiences, good or bad? I’d love to hear about it in the comments
below. And if you’re wondering if you have enough
insurance, you’ll have to wait 2 weeks. That’s my topic for next time. Hit the subscribe button and the notification
bell so you don’t miss it. If you have any questions, leave them in the
comments below, or reach out to me on LinkedIn. I’m Susan Daley and this has been Your Money,
Your Choices.

3 comments

Susan Daley is very informative and inspired me to start my own YouTube channel.
Thank you for your videos Susan and keep up the great work you do!!!🙂

sorry i didnt want to read a book about insurance that s why im here on YouTube ,you sound like you are reading from a book…thanks for the effort though

This helped a lot! I am study the ChFC Level 2 (Insurance) and the textbook chapter on this was horribly written. This clarified so much. Thanks!

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