What are the advantages/disadvantages of term and permanent insurance?
There are pros and cons to buying both term or permanent (cash value)
insurance. Each has advantages and disadvantages. One or the other
or both may be appropriate to meet your insurance needs.
advantages of term policies include:
Term premiums are lower than those for permanent insurance so you
get more insurance coverage for less money. This allows you to buy
more coverage when you need it the most, such as when you have young
Because term provides insurance for a specific period of time, it
is ideal for covering specific financial needs such as covering
your life until your children are through college, until they are
self-supporting, or covering your life until you pay off your mortgage.
The disadvantages of term policies include:
Premiums increase every time a policy is renewed, so the cost of
term life insurance can become prohibitive as you near your late
50s and 60s.
Term life insurance
doesn't provide a savings feature known as cash value. Term life
policies only pay benefits if you die while the policy is in force.
If your insurance company wants you to take a medical exam when
you want to renew your policy, you may be turned down if your health
condition has deteriorated.
You could outlive your coverage, because term insurance is generally
not renewable after age 70 or 75, depending on your states
(Cash Value) Insurance
advantages of permanent insurance are:
You lock in a premium rate at whatever age you start the policy
and the benefits are guaranteed for as long as you live.
Your policy accumulates cash value that grows tax-deferred. Your
premiums are invested by the insurance company in stocks, bonds,
real estate, venture capital and other funds, and you receive a
return on your money in the form of annual dividends, which increase
your cash value.
You can tap that cash value while you are alive with low-cost loans.
Any outstanding loans will reduce your policys cash value
by the amount of the loan. Or you can withdraw the cash value, though
you will have to pay income taxes on those withdrawals. You can
also convert your cash value into an annuity that will provide fixed-income
throughout your retirement years.
If you surrender your policy by discontinuing to pay premiums, you
will receive any accumulated cash value.
Dividends can be used to pay your premium in whole or in part.
Once you have passed the medical tests and have been issued a policy,
your policy cannot be cancelled for medical or any other reasons
if you continue to pay the premium.
The disadvantages of permanent insurance are:
It is far more expensive than term insurance. This means that you
can usually afford far less permanent coverage than you can afford
term. If you start a permanent policy and then must drop it because
you cannot afford the premiums, you will have lost a great deal
Insurance companies invest your cash value quite conservatively
so it is possible that you could earn higher returns on your own
if you are a skillful and knowledgable investor.
The return you earn on your cash value is determined by current
interest rates in money markets. So if interest rates are high,
your cash value will grow much more quickly than if interest rates
are low. Periodically, the insurance company deducts its expenses
and a mortality charge from your cash balance. The mortality charge
is the amount of money, based on a premium rate per thousands of
dollars of death benefits, required to provide you with life insurance.
The company will guarantee a minimum interest rate and a maximum
mortality charge. Some will also guarantee a maximum expense charge.
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