When we talk about life insurance, many people envision the ultimate outcome: a payout to a beneficiary when someone passes away. And that is true, for term life insurance. Permanent life insurance takes it a step further. Not only does it include a death benefit, but it features a cash value or savings benefit, which can be used by the policyholder in a variety of ways.
What’s the difference between permanent and term life insurance?
Term life insurance provides a death benefit, which is generally paid to the beneficiary free of federal income tax. The insurance pays the policy's death benefit if the insured person dies while the policy is in force. The policyholder keeps the policy active by paying the premium in full each year.
Permanent insurance, on the other hand, is intended to last a person's lifetime. The premium is generally higher than term life insurance because it not only funds the tax-free death benefit, but a cash value account. In addition to the death benefit, the policy's "cash value" grows over time and can be used for a number of purposes, including low-interest loans, while the policyholder is alive. Policyholders can use the cash value account to create an income stream for supplemental retirement income as well, though that may affect the death benefit.
Why buy permanent life insurance instead of term?
Two advantages of permanent life insurance are that the premium amount generally remains level through the insured’s lifetime, and also the guaranteed-savings aspect.
The savings aspect of permanent life insurance is especially good for people who may not be as disciplined about saving money on their own, says Jason Hamilton, a California-based financial planner. Term insurance is intended to cover death-related financial losses, with the idea that the person saves money through other investments so they would have enough assets to pay for dependents' living expenses, should the person die after the insurance policy ends. If someone isn't motivated to save through other means, permanent life insurance is a way to build savings through the premiums.
Some people prefer to have both types of insurance. According to a LIMRA study, done by a life insurance research company, 18% of Americans who have life insurance have both permanent and term policies. They use them as an effective strategy for lifelong, affordable coverage.
Why keep permanent life insurance?
Permanent life insurance policies usually have surrender charges. That means that if you cancel a policy during the early years of the policy, a portion of the cash value is forfeited as a penalty.
Dropping permanent insurance may mean that the person won't have any life insurance coverage, which leaves family members at risk if the person dies. As someone ages they are less likely to qualify for term life insurance. Both permanent and term insurance usually require a person to pass a physical exam. The rates to start a new policy or continue after the term policy changes, are based partly on the person's current age and health status. Someone may not qualify for term insurance if they've had certain medical conditions.
Buying life insurance can be a smart move no matter which type of insurance you get. For more information on the benefits of permanent term life insurance, check out this slideshow.
You want to ensure you choose a company with the financial strength and stability you're looking for. And when you’re deciding between purchasing term or permanent life insurance, talk with a financial advisor or call Nationwide at 844-538-9998 to help you make an informed decision.