The Two Basic Types of Life Insurance Explained

It has been said that in order to live a fulfilled life, one has to invest in the welfare of others. Some people resort to charity works, building foundations for the needy, and even granting the wishes of impoverished kids by standing as a sponsor. In all honesty, not everybody has that kind of abundance in just one sitting; investing time, money, and enthusiasm can be quite taxing. A common, but still quite noble act one can indulge in is Life Insurance. Does it sound mundane? Yes, but even a small seed, when properly cared for, grows to bear fruit for reaping.

What is Life Insurance?

Life Insurance is basically a sum of money that is paid for by the insurer for a fixed duration within a year, for a pre-set number of years, depending on the agreement between the insurer and the firm. The money is then disseminated to the insured after a decided period of time or upon his/her death, transferring the acquired summation onto the insurer’s beneficiaries for them to use.

Permanent Vs Term Life Insurance

The two basic types of life insurance are as stated: permanent and term. The permanent insurance promises coverage for one’s life while a term insurance provides temporary coverage which is set by the firm. Below is a summary of the differences between the two types

1. Length of Coverage

Term insurance provides coverage for a pre-set number of years, and when those terms are up, the insurer is allow to renew his account. Permanent insurance provides lifetime coverage just as long as the policy is still in force. This type of insurance includes two sub types– whole and universal life insurances.

2. Insurance Cost

Term insurance premiums are generally lower than its permanent counterpart but increase upon each renewal. Permanent insurance is comprised of two parts: a savings or investment portion and an insurance portion. Due to the presence of the savings element, the premiums are quite high, which builds up your cash value. Permanent insurance is also usually tax-free upon withdrawal (depending on the policy). Conversely, the term insurance only provides for insurance, sans savings.

3. Cash Value

As stated in the previous paragraph, in permanent insurance, there is a savings element comprising a cash value; the longer one faithfully pays into the policy, the more the cash value grows. One can then withdraw or loan the money from the policy and use it as needed. Term insurance does not grant the same benefits as it does not have a savings element.

4. Convertible Policies

If one invests in a term insurance and chooses to convert it into a permanent policy, one can do so. Permanent policies cannot be converting into term policies.

5. Death Benefits

Both permanent and term insurances provide life insurance protection and pay the money out when death is claimed by an assigned beneficiary. In case a term policy expires before the insurer does, then the money cannot be paid out, encouraging the insurer to renew his policy. In a permanent insurance, the insurer’s beneficiaries will receive a death benefit as long as the policy is still active when the insurer passes away.

Life insurance can seem pretty trivial, but it is of so much use to those who can benefit from it. If you are willing to forego the long term benefits of permanent policies like its increasing cash value, then it would be best to go with a term policy. But if you feel the need to save while investing in insurance, then a permanent policy would deem best for you.


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