Which Type of Life Insurance May Be Right For You?

Life insurance paper scrap

There are two basic kinds of life insurance:

  • Term insurance is simple, affordable coverage you buy for a set period of time.
  • Permanent insurance combines insurance with savings and covers you for life.

Term life insurance

Term insurance is designed to pay your beneficiary(ies) a lump sum if you happen to die during the stated "term" of the policy. Term policies usually offer coverage for periods of 10, 15, 20 or 30 years. Even though the coverage spans many years, you can pay premiums in shorter installments such as annually, quarterly or monthly.

Term policies typically build no cash value. Therefore, if you cancel your policy, the insurance company keeps all premiums paid and the insurance protection stops.

Permanent life insurance

If you want a policy that can cover you for the rest of your life, look into permanent insurance. Permanent insurance comes in many forms such as ordinary life, universal or variable universal life.

Premiums for permanent insurance are often higher when compared to term; however, permanent policies have the potential to build cash value that you can withdraw or borrow from if the need arises. Unpaid loans and withdrawals will reduce the death benefit and there may be tax consequences.

Comparing term and permanent life insurance

In general, the longer you need life insurance protection, the better the value permanent insurance can be. If you need protection for a shorter period, term insurance may be a better choice. Or consider a hybrid approach: Buy both a term and permanent policy while your protection needs are high, and discontinue the term policy when it’s no longer needed.

Term Insurance

Permanent Insurance

ProtectionLevel or decreasing death benefitsAdjustable — you have the flexibility to change your death benefit option or the amount of the death benefit.
PremiumsLevel or increasingYou can change the payment amount and how often you pay. Increase, decrease and even skip payments, within certain limits. Note: Restrictions may apply.
Potential for cash value accumulation
Generally no cash value, although some term policies offer return of premium provisionsOffers the potential to accumulate cash value. Earnings, if any, grow tax-deferred. You may be able to access cash value through loans and withdrawals.1

Purchasing life insurance is one of the most important things you can do to help protect your family’s financial well-being. The right type of policy, and the right amount, depends on why you need insurance and what features are important to you.

1Restrictions may apply. Withdrawals and unpaid loans reduce the death benefit and there may be tax consequences.

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