This has to be the most asked question that an insurance agent gets in the normal week. So I will try to explain the basic differences using general terms and the example of homeownership verse apartment renting, an experience most can relate to.
In permanent and term policies there are lots of variations but for the sake of keeping this simple we won’t go into those variations. There are some who advocate only buying one kind of policy and never any of the other. Picking the kind of policy you will buy before you have determined any of your financial goals is limiting yourself and that may not be in your best interest down the road.
Just as when you have something wrong with you, the doctor must know all the symptoms and check you thoroughly before making a diagnosis and recommending a treatment. Otherwise the recommend treatment may do more harm than good. You need to have a life insurance professional help you determine what your goals are and what path you will take to reach it. Then and only then do you make a selection of the insurance product or products that helps you reach your goals.
Permanent life insurance is like buying a house verse renting one. Permanent plans provide coverage for an indefinite period of time and like a house you can pay them off, or have what insurance companies call a paid up policy.
And like your home equity loan, you can take a loan against the cash value in a permanent policy. Permanent life insurance premiums remain the same for the duration of the policy. Part of each insurance premium payment is applied to the policy’s cash value account, which normally grows on a tax-deferred basis.
In some cases, permanent life policies may also be entitled to policy dividends, declared from the insurer's surplus, and an excess-interest whole life policy may earn an additional amount of interest after a specified period of time. Policy dividends and excess interest payments are not guaranteed.
Term is like renting an apartment, as long as you make your rent payment you get to stay. A term policy builds no cash value so just like your apartment never builds equity that you can make a loan against; neither will your term policy. And just as the apartment rent is always due, so is a term policy, there is no paid up term insurance.
One of the benefits of term insurance is that it typically is the least expensive and simplest type of coverage, just as renting an apartment is cheaper than buying a home. But at some point in the renting experience you will look at the money you have paid for renting and wonder if buying a house wouldn’t have been better. Term provides a fixed period of time coverage and typically may be renewed after the initial contract term expires. The premiums are lowest when you are young and increase upon renewal as you age.
Mark Czachowski represents Czachowski Insurance Agency.