Differences Between Term & Cash Value Life Insurance Policies

Life insurance policies come in two general types. Term life insurance is short-term insurance lasting up to 30 years, while cash value insurance lasts for the holder's entire life and offers a cash value savings component.

Benefits

Term life insurance allows you to purchase life insurance for a relatively low cost compared to the size of the death benefit. Cash value life insurance provides a cash savings that you can use for any reason throughout your entire life. The cash value represents a return of your premium payments plus interest.

Drawbacks

Cash value insurance initially costs more than term life insurance. The cash values generally take at least 10 years to build up to levels where it makes sense to borrow against the policy. Term life insurance is temporary insurance which will eventually end, and the cost of insurance on renewal increases substantially.

Uses

Term life insurance is great for insuring mortgages and vehicle loans that represent short-term or intermediate-term insurance needs. Cash value insurance is ideal for permanent life insurance needs, such as burial, while the cash value savings can be used to supplement your retirement income until your death.

References

• "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
• "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; Prentice-Hall Inc.; 1994
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007