Difference Between Term Life Insurance and Permanent Life Insurance
Life insurance, on its face, is not very complicated. However, when potential policyholders are shopping for life insurance, the difference between types of insurance can make the process complicated. Term life insurance and permanent life insurance (also referred to as whole life insurance) have some stark divergences even though they also have similarities that make them both life insurance policies.
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Function
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Life insurance is a basic way of guaranteeing that survivors are not burdened with funeral expenses and is also a way of insuring that survivors have some financial stability after the insured dies. In the case of business, it is a way of leveraging the value of a life insurance policy against an investment.
Term Life
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Term life insurance is fairly easy to understand because it is a simple agreement between the policyholder and the insurance company. The agreement is that for the payment of premiums by the policyholder, the insurance company will pay the face amount of the policy upon death. It is called term life insurance because it is only good for a specific term—one year, 30 years, etc.
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Permanent Life
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Permanent life insurance carries the same agreement as term but adds an “investment” component. Part of each premium goes to the death benefit and part goes to an investment account referred to as a “cash value account.” The policy is called “permanent” life insurance because it does not expire.
Differences
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Term life insurance is based solely on the face value of the account and can be obtained inexpensively while permanent life insurance focuses on maintaining the face value, leveraged against the cash value, and has a higher expense. Permanent life insurance premiums can decrease over time, as the cash value increases, while term remains static.
Similarities
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When death occurs, the beneficiary will be paid the value of the policy in the case of both term life and permanent life insurance. While permanent life can be more expensive, over time the premiums for both types can rise.
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References
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