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What is Term Insurance?
Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of a specific period, which can run from one to 20 years. The premium rates increase at each renewal date. Many policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.

What is Permanent Insurance?
Permanent insurance provides lifelong protection and is known by a variety of names, described later. As long as you pay the necessary premiums, the death benefit always will be there. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, it could be the wrong type of insurance for you.

Most permanent policies - including Whole, Ordinary, Universal, Adjustable and Variable life - have a feature known as "cash value" or "cash surrender value." This feature, which is not found in most term insurance policies, provides you with some options:

  1. You can cancel or "surrender" the policy - in total or in part - and receive the cash value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
  2. If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live.
  3. Usually, you may borrow from the insurance company using the cash value in your Life Insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

The cash values of many Life Insurance policies may be affected by your company's future experience, including mortality rates, expenses and investment earnings.

Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash value is the amount available when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.

What are the types of permanent insurance?
There are many different types of permanent insurance. Here are the most common:

    Whole Life or Ordinary Life
    This is the most common type of permanent insurance. The premiums for a Whole Life policy must be paid periodically in the amount indicated in the policy. These premium amounts generally remain constant over the life of the policy.

    Universal Life or Adjustable Life
    This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional Whole Life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.)

    Variable Life
    This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward - stocks, bonds, combinations of both, or accounts that provide for guarantees of interest and principal. You will receive a prospectus in conjunction with the sale of a variable product.

The cash value of a Variable Life policy is not guaranteed, and the policy holder bears that risk. However, by choosing among the available fund options, the policy holder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits. Some policies guarantee that death benefits cannot fall below a minimum level. There are both Universal Life and Whole Life versions of a variable life.

What are the advantages and disadvantages of Term and Permanent insurance?

Term Insurance


Advantages
Initially, premiums are generally lower than those for Permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.

  1. It's good for covering specific needs that will disappear in time, such as mortgages or car loans.

Disadvantages
Premiums increase as you grow older.

  1. Coverage may terminate at the end of the term or may become too expensive to continue.
  2. Generally, the policy doesn't offer cash value or paid-up insurance.

Permanent Insurance
Advantages

  1. As long as the necessary premiums are paid, protection is guaranteed for your life.
  2. Premium costs can be fixed or flexible to meet personal financial needs.
  3. Policy accumulates a cash value that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance.
  4. The policy's cash value can be surrendered - in total or in part - for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's lifetime or for a specific period of time.)
  5. A provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.

Disadvantages

  1. Required premium levels may make it hard to buy enough protection.
  2. It may be more costly than term insurance if you don't keep it long enough.